What is an Auto Balloon Loan?
Q: What’s an auto balloon loan and how does it work?
A: An auto balloon loan is a type of car financing arrangement where the borrower makes smaller monthly payments over the life of the loan, and then pays a lump sum at the end of the loan term. Let’s take a closer look.
How is an auto balloon loan different from a traditional car loan?
Auto balloon loans and traditional vehicle loans have a similar shopping and buying process, but the payment plan for auto balloon loans is structured differently.
In a traditional auto loan, the loan amount is divided evenly throughout the life of the loan. At the end of the loan, the balance is paid in full.
An auto balloon loan features a much lower monthly payment. At the end of the loan, though, the borrower must pay a larger lump sum, or a “balloon payment” to cover the remaining balance. That balloon payment may be as much as 50% of the total loan amount.
Balloon loans also tend to have shorter terms than traditional loans and may have a higher Annual Percentage Rate (APR).
Advantages of auto balloon loans
One big advantage of an auto balloon loan is that it allows the borrower to buy a car they may not have been able to otherwise afford. Also, since the balloon payment is made at the end of the loan term, the borrower has several years to save up for it.
Disadvantages of auto balloon loans
The most glaring drawback of auto balloon loans is the large payment the borrower makes at the end, which can be difficult for many people to afford. Also, the borrower often pays more interest during the loan term. Finally, auto balloon loans can be harder to refinance should the need arise.
Is an auto balloon loan right for me?
An auto balloon loan can be a good choice under these circumstances:
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The borrower can’t afford a large monthly car payment, but can save up for the balloon payment.
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The vehicle has a high resale value and can be sold to help meet the balloon payment.
Use this guide to make an informed choice about auto balloon loans.