Balloon payments can lower the monthly cost of your vehicle, but it won’t make your car loan any less expensive — and could even make it more difficult to afford. Find out when you can benefit from balloon financing and when you may not.
A car loan with a balloon payment has smaller monthly payments throughout the loan term and one large “balloon” payment at the end of the loan. Balloon financing can lower your monthly costs without lengthening the loan term. But unless you have a lump sum of money ready when the payment is due, you might be faced with a bill for hundreds or maybe thousands of dollars you can’t pay. Balloon payments are also common on auto leases.
Technically no, a balloon loan typically costs the same as a traditional loan. Paying less each month means you’ll have to make up the difference through the large balloon payment at the end of the loan. Also, some car loan providers will hike up the interest rate on loans with balloon payments. So you could end up paying more in interest than you would with a traditional car loan.
While opting for a balloon payment offers you some nice benefits, like lower monthly payments, balloon financing is ultimately much more risky than a traditional car loan. Consider these pros and cons of balloon loans below to help you decide if getting one is worth the risk.
You can find out how much your monthly payment will be with balloon financing using this car loan calculator. Simply subtract the amount of the balloon payment from your total loan amount, enter your new balance into our calculator below and click “Calculate” to find out how much you will owe each month.
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Ask yourself these questions if you’re on the fence about singing up for a car loan with a balloon payment at the end:
While balloon financing will lower your monthly repayments, working out how much the lower payments are costing you in additional interest over the loan term is a crucial step. Are the long-term costs worth the short-term savings?
Many people put money away in a savings account or end up putting the amount on a no-interest credit card. Whatever you decide, have a goal in mind for how you will manage the final balloon payment.
A car’s value decreases over time. If the car’s value is worth more than your loan amount after 3 to 5 years, you might want to consider leasing the vehicle instead of buying — that way you can return it instead of paying more than its resale value.
Balloon financing is a gamble. If you’re thinking of using a balloon payment loan to buy your dream car, you might want to consider going for a less-expensive alternative while you save up. It just might not be worth the risk unless it’s the only option you can afford.
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Yes, you can trade in your vehicle before you’ve made the final balloon payment – but you’re still responsible for the amount owing on your loan. The best thing to do is pay the balloon payment to close out your old auto loan before you trade in your vehicle. If you don’t pay the balloon payment first, you may be able to put money from the vehicle’s trade-in value towards the outstanding balloon payment.
Alternatively, you could roll the balloon payment into your next car loan – although that could put a financial strain on you in the future. Let’s say, for example, that the balloon payment on your old car is $7,000 and you want to trade it in for a car that is worth $25,000. Instead of getting a 6-year car loan for only $25,000, you have to add the $7,000 for your balloon payment, making your new car loan cost $32,000. You would still have only 6 years to pay off the full $32,000, plus interest. Also, rolling old debt into a new car loan can easily lead you into an upside-down car loan, where you owe more on your car loan than the vehicle is actually worth.
If the loan was secured by your car, and you can’t pay your balloon payment at the end of the loan term, the lender could repossess your vehicle. If not, the lender might send your repayment to collections.
Either way, skipping out on your balloon payment will damage your credit and could make it difficult for you to get other types of financing.
The most common way to get out of balloon financing is to refinance with another lender. You’ll still have to pay off that amount, but it’ll break it up into more manageable repayments.
Refinancing essentially allows you to extend your loan term so you can pay off your car loan with low repayments the whole time.
Many dealerships make their money by refinancing balloon payments. If you’re coming to the end of your loan term and are unable to pay your balloon payment outright, auto refinancing could be a good option.
Take your time reviewing your options and making a final decision. You don’t need to refinance with the same lender, and the terms of a refinanced loan should benefit your financial needs.
Car loans with balloon payments can keep your monthly payments low, but they do leave you with a large payment to deal with at the end of your loan term. Keep your financing options open and consider other car loans before you decide.
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