The so-called “balloon loan”, final installment loan or “balloon financing” is a type of loan that represents a type of installment with a final transfer fee, a comparatively high final installment. Compared to the classic installment loan, the main difference between car loan financing and balloon financing is that the loan, which is normally provided for vehicle financing, is not paid at the end of the lease term. The remaining amount is also the namesake of the form of credit, it is referred to as a “balloon” – ugly, as the “thick end”.
This is not the case with a car loan based on installment payments. The calculation provides that the vehicle is fully paid off at the end of the term and becomes the property of the borrower when the loan is received. In return, in the case of classic leasing, the vehicle remains the property of the seller until the very end. Making the car loan through balloon financing is an alternative to both financing methods.
As a result, monthly rates remain low despite higher interest rates, but de facto only part of the loan amount is paid. So settling the car loan as balloon financing means that ultimately only a part of the car will actually be paid off.
Beware of the hot air balloon
The car buyer must be aware that the relatively small monthly amount is currently financially affordable, but usually and depending on the contractual basis only about half of the equivalent value is paid. The final installment for this form of credit must never be higher than the remainder of the purchased vehicle, so that the buyer does not suffer any financial loss, whereby the borrower should be aware that a large part of the monthly installments is not interest but repayment. In view of the attractive rates, the borrower should not be tempted to withdraw, but rather to clarify the possibilities and risks of the form of financing.
Stay on the ground better
Making the car loan through balloon financing is thus most suitable for persons who have a guaranteed payout at a foreseeable time, for example in the form of a freed up fixed asset or a home savings contract, available and want to start by low rates to start a car. Even if there is no safe transfer fee in view, the final installment loan can be used provided that the borrower is aware of the possible procedures after the installment has expired and can not blindly be tempted by low monthly installments, but prefers his planning options.
The following procedures for completing the term are available to the customer:
The loan can, as ideally envisaged, fully acquire the vehicle at the end of the term by settling the balance of about half of the new value. Once the final installment is paid, he has finally purchased the vehicle, the “car loan balloon financing” is paid.
If the customer is unable to pay the final loan, the vehicle may be returned to the dealer and resold by the dealer. The vehicle was then “rented” at a comparatively high interest rate, paying the final installment on sale to another buyer. The “car loan balloon financing” then corresponds to a kind of subsequent leases.
The final installment may also be subsequently funded through another loan, either from the same lender or from another credit institution. Here are again to be negotiated, usually quite high, interest rates.