Car balloon payments are a great way to finance your next car, but they may not be right for everyone. This post discusses car balloon payment and how it works. Covered also are the pros and cons of using this type of financing when purchasing your next vehicle. Let’s get started.
What Is a Car Balloon Payment?
A car balloon payment is a large payment you make at the end of your car loan term. It’s typically 2-3 times as much as your regular monthly payment, but it pays off all remaining principal and interest due on your loan in one go.
Car loans are often structured like this because it helps buyers get into nicer cars than they would otherwise be able to afford and gives lenders such as bad credit car finance dealerships a guaranteed return on their investment up front.
How Car Balloon Payments Work
You make smaller payments for a longer period of time, and then you make one large payment at the end of your loan. Car balloon payments are a type of auto financing that allows you to pay off your car loan in full sooner than normal. A balloon payment is often used when purchasing expensive vehicles such as RVs.
When making a car balloon payment, you have two options: pay off all remaining principal balance at once or make monthly payments until it reaches zero (which means no more debt).
Pros and Cons of Balloon Payments
Balloon payments are a great way to buy a car, but they do come with some pros and cons.
Pros
Smaller Monthly Payments
A balloon payment comes up at the end of the loan, but you are still responsible for making regular payments until that time. A balloon loan allows you to make smaller monthly payments that work with your budget.
Buys You Time
Balloon payments allow you to buy time, so you don’t have to take out an expensive loan and get stuck paying it off over time. Sometimes it’s good to have time on your side when it comes to things like a car purchase.
Cons
Large Payment at the End of the Loan
Balloon payments are typically made at the end of a long-term loan. This can be problematic for borrowers who don’t have enough money saved up to cover these payments when they are due.
Risk of Being Upside Down
This means owing more than your car is actually worth. That can happen if the resale value decreases between the period when you buy it and when you pay off the loan.
What Are Your Options When Your Balloon Payment Is Due?
When your balloon payment is due, you have four options:
- Pay the final car loan repayment
- Trade in the car (if you want to buy another vehicle)
- Sell the car (if you don’t want to keep it)
- Refinance (if you have good credit)
Takeaway
The balloon payment is a great option for those looking to buy a new car from bad credit car dealers but don’t have the cash on hand for the full amount. It allows you to pay off the loan over time instead of all at once, which can be helpful if you don’t want to take out another loan or sell something else to afford it all at once.