I’ve seen people asking “how does a balloon car loan work” several times and I feel its about time I address this topic. It is a question worth answering because many have found themselves in situations they wouldn’t be in by now if they had an answer to this question earlier.
To begin with, car loans are good and are essentially there to help borrowers purchase cars/vehicles which they ordinarily wouldn’t have been able to if they were to cough up th lump sum needed to purchase the car themselves. However, desperation or ignorance has led many into taking loans without properly understanding the terms of the loan and whether it works well for them or not.
And one of such is the balloon car loan which is quite different from the normal car loans you are used to and I’m going to show you how it works in this article.
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What Is A Balloon Car Loan?
A balloon car loan is a type of car loan that comes with lower monthly payments than the traditional loans throughout the loan term. However, the borrower will be required to make a lump sum payment at the end of th loan term which is far larger than te monthly payments.
The lump sum you pay at the end of the loan term is called “balloon payment”. Some borrowers prefer this type of loan because of the lower monthly payments. However it comes with certain cons you should take into consideration before agreeing to this type of loan.
How a Balloon Car Loan Work
This type of loan is very common to mortgage lenders and car loans providers. The payment plan for this type of loan is different from the traditional loans and also has relatively higher interest rates.
Unlike the traditional loans where monthly payments go into the settlement of interest and principal till the end of the loan term, monthly payments made for a balloon car loan is not intended to settle the entire loan. Rather, it only pays a portion of the amount owed till the end of the loan term where the borrower makes a lump sum payment (balloon payment) usually 50% or more of the value of the vehicle/ car.
Although this type of car loan offers lower monthly payments which many borrowers prefer, the cost of the loan is relatively higher than the normal loans. The real difficulty is when you have to make the balloon payment at the end of the loan term.
Failure to make the balloon payment may cost you your car. Hence to avoid that, check out what you can do at the end of the loan term.
What to do at the end of the Loan Term
Here is what you can do at the end of the loan term;
- Cash Payment: undoubtedly assured way of securing your car at the end of the loan term is t make cash payment when the balloon payment is due. Hence you should begin to make arrangements or preparations towards the balloon payment right from day one to avoid any challenges when payment is due.
- Refinance: you may consider refinancing your old car loan so you can keep the car. However, some lenders do not allow refinancing hence you will have to look around to see if you could get refinancing elsewhere.
- Return the car: sometimes the best thing to do is to walk away from your troubles or problems and you can do same here too. You can return the car if you realise you may not be able to make the balloon payment at the end of the loan term which will cost you your car. You will however be required to make a balance payment if the value of the car is not up to the balloon payment.