If you’re on the hunt for a car loan, you may have come across the option of a balloon payment in your search. Although a car loan balloon payment could make your repayments smaller, it won’t make your loan any less expensive. As a result, it’s important to make sure you know the benefits and risks before you make a call. Let’s take a look at the key factors to keep in mind when weighing up your options.
A car loan balloon payment is when you make a certain amount of small loan payments and finish the loan with one large payment. You might be able to find some car loans that have balloon payments for lowering your initial repayments without extending the loan term. Car loan balloon payments are also common on car leases.
When shopping around and comparing loans, you may come across the terms ‘residual payment’ and ‘balloon payment’. Both of these terms refer to making a lump sum payment at the end of the car loan. However, they each serve different purposes. Residual payments are typically used for car leases, not car loans. The size of the payment is calculated on the final value of the car after the lease has been paid.
Balloon payments, on the contrary, are solely based on a fixed percentage of the borrowed amount and unlike residual payments, they’re not affected by the car worth at the end of the loan term.
It all depends on your personal situation. Although it might seem that balloon payments make your auto loan more affordable, it’s not always the case. Regardless of how low your monthly payments are, you will always have to end up paying a large sum at the end of the loan. Some people might find that the large payment is difficult to make, which is why many people start saving up as soon as their loan starts. Others might opt for a balloon payment knowing that they’re going to have more disposable income in the future.
If you end up finding that you can’t afford your car loan balloon payment anymore, your second option would be to refinance your current loan. This will result in you lengthening the loan term and potentially increasing the overall cost. Otherwise, if refinancing isn’t an option for you, you may use your car as a collateral asset to help pay off your debt.
Although you’ll owe a large amount after making several small repayments, balloon payments have some benefits. Here are the major ones you should consider:
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Balloon payments aren’t necessarily suited for everyone. Although there are some benefits to taking out a car loan balloon payment, if you don’t have the money to pay the large lump sum at the end of the loan, you might find yourself in financial trouble. As a result, you should also consider these disadvantages before fully committing to the loan:
There are a range of online repayment calculators that can help you estimate what you’d owe every month. There are also calculators that can help you estimate your final balloon payment. Although ultimately, repayments will differ from lender to lender. If you’re looking at balloon payments, make sure you check with the loan provider to get an exact quote.
Before getting a car loan balloon payment, you may want to ask yourself these questions:
There are plenty of factors to consider when taking out any type of car loan. A big one is the interest rate of the loan. For example, do you plan on getting your loan on a fixed rate or variable rate? Additionally, you might want to consider where you prefer taking out your loan. Do you prefer taking out a loan through a bank or private lender? There are many advantages and disadvantages to both. Ultimately, what’s right for you will depend on your preference and what you believe suits your needs and financial position the best
If you have your car as security for your loan, then the lender can repossess the vehicle. Otherwise, the lender could also send your repayments to collections.
Regardless of how it’s dealt with, not paying off your balloon payment will harm your credit score and might make it more difficult for you to access other types of finance in future. Having a poor credit report could also affect future employment opportunities. Make sure you review your credit report to ensure you have the right credit score and there aren’t any mistakes listed.
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When your loan term is up, you have to make the balloon payment to your lender. If you find that the payments throughout the loan term have drained you and you weren’t able to save up enough cash to pay off the balloon payment, then you might need to consider selling your car to make up for the debt.
Selling your car could also be a good option if you’re considering refinancing and buying a new model. However, keep in mind that you should probably plan this ahead before taking out a loan. It’s important to know that the loan would cost less than the resale value of the car. If you’re planning on refinancing and buying a new model, you can estimate how much your car would depreciate in that term.
Jacaranda Finance is an online lender that can help you access car loans from $5,000 to $35,000. We don’t offer balloon payments on our car loans, however, we do offer flexible repayment plans. Our application could take you just a few short minutes to complete and – best of all – it’s free to apply! So, even if you’re not sure whether we could help you, we encourage you to apply. We’ll work hard to find you a finance option, regardless of your situation.
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