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What is a balloon loan?

What is a balloon loan? What is he about? Who can take a balloon loan for a car? You will get answers to these questions by reading an article on the increasingly popular method of financing the purchase of a new car.

A balloon loan and where can you get it? Who can take this type of loan? Answers to these questions can be found in the article on the popular form of financing the purchase of a new car, which is undoubtedly a balloon loan.

This specific type of loan is intended for the purchase of a new car

This specific type of loan is intended for the purchase of a new car

The principle of operation of a balloon loan is primarily a high balloon installment, which is incomparably larger than the standard installments we pay throughout the loan period. The balloon installment is the last part paid for the car and not is included in the calculation of the creditworthiness.

For example, if a car costs USD 60,000 and the last installment is 20% of this amount (i.e. USD 12,000 – balloon installment), the creditworthiness is calculated from USD 48,000. Then the monthly loan installments will also be lower. Let’s say we divide the repayment into 5 years or 60 months. Then, for 59 months, we pay the installment with interest calculated from USD 48,000.

The vast majority of new cars are sold in installments

The vast majority of new cars are sold in installments

A balloon loan is just one of several options for financing the purchase of a new car. For some people, it is the cheapest car loan. For whom? Well, this is the best solution for people who like good cars and want to change them often. This type of loan can be taken by both a natural person and an entrepreneur.

Balloon loan offers are usually found in car dealerships or specialized car banks. For example, one of such banks offers a balloon loan for 24, 36, 48 and 60 months.

For the 24-month period, the last installment, i.e. the so-called balloon installment, is 50% of the car value, for a 36-month period it is 40%, for a 48-month period it is 30%. However, when you take out a balloon loan for 60 months or 5 years, it is only 20% of the car’s value.

To pay off the last and highest balloon loan installments we have several options. We can simply pay it in full or refinance – that is, spread over subsequent installments. There is one more way, however, very popular when it comes to balloon credit. Well, we can sell the car in a car showroom or exchange it for new ones.

Compared to regular car loans

Compared to regular car loans

A balloon loan can be much cheaper. However, this solution has several negative features. In addition to the fact that a large first payment is usually required from the customer, it is only granted to selected models. As you can guess, these are mainly models that sell poorly. This practice increases the sales of cars for which there is in fact not much demand.

Of course, there are several options for paying off balloon loans. The option presented here is only one of several. So-called 50/50 loans are also offered (i.e. the customer pays 50% of the vehicle value and the remaining 50% only after a year) or 30/30/30. However, it can easily be concluded that this is rather a solution for
more affluent people.