You have most likely heard of a balloon payment, but you may not understand its uses and what it can be used for.
A balloon payment is designed to help a buyer with their cash flow at the start of the financing agreement. With a balloon payment, a portion of the purchase price is set aside so that the monthly instalments are lower.
However, even though this amount isn’t included in your monthly repayments, it is still there and still needs to be paid at the end of the finance term. If you opt to go this route then you will need to be financially disciplined to save enough so that you can settle this debt when it is due.
What Does a Balloon Payment do to Your Repayments
Taking a balloon payment does mean that your monthly car repayments will be lower. Essentially, you will be deferring a certain amount of the purchase price, which will need to be settled once the contract has ended.
As the buyer, you will then need to save up the deferred amount whilst paying the loan, so that you will be able to pay it when it is due.
A balloon payment can seem attractive, especially if you require a bigger or fancier car, but you must do your research before you sign on the dotted line. It can be quite easy to forget about a looming lump sum after a few years of driving, but it isn’t going anywhere and will need to be paid.
Are You Right for a Balloon Payment?
A balloon payment deal requires discipline and an understanding of monthly budgeting. If you do not feel that you would be able to manage your cash flow well or be able to save during the finance term, then taking a balloon payment is not the right move for you to make.
It is an attractive prospect though as you will be able to keep your monthly costs down, however, you shouldn’t look at this type of deal as a way to pay for a car that you can’t afford.
Is a Balloon Payment Right for You?
A balloon payment does have some advantages as long as it is properly managed.
The money that you save on monthly repayments should cover the costs of interest for a loan, so at the end of the term, the lump sum of debt can be refinanced, but this will depend on the percentage of the balloon payment.
There isn’t any interest added to the balloon payment that you take, so you won’t be paying even more on your loan in the end.
Making a good deposit will be more financially beneficial as it will bring your breakeven point forward and will lower the monthly repayment and the deferred debt if you decided to take this.
If you are still not sure if this is the right financial move then it is best to seek the advice of a qualified finance manager at a reputable car dealership. You also need to be honest with yourself and financial discipline as you will need this to be able to save.