A balloon payment on a car loan has a number of benefits, that a lot of purchaser considers it as a better alternative to traditional auto loan. The payments are lower, mainly because balloon loans carry low interest rates and they require the borrower to repay in smaller amounts on a monthly basis.

That’s why it has become a lucrative option for those who are thinking of buying a new vehicle.

What Is a balloon payment

The term “Balloon Payment” and “Residual Value” are expressions that can be interchangeable. Both of which are terms used to depict the lump sum payable to the lender at the decision of having a loan after the needed installments have been given and completed.

This type of lump sum payment is beneficial to a borrower because it can dramatically reduce the installments needed on the loan. The reason for this is that, whenever the borrowers are incapable of paying the principal amount of loan during the loan term, the repayments will be reduced.

This results to the borrower paying back less than the needed principal off the loan with each repayment made– a Balloon offset becomes a crucial part of the lending term process.

That said, the use of Balloon payments has a number of benefits, and some of these are the following:

1. A reduction to monthly instalments. There are some loans that are big enough that it’s structured in a way where the interest payment is also considered as the monthly payment. For this, the principal would be the balloon payment and nothing more.

2. No down payment required. There’s no need to have a down payment when choosing this option. More often than not, a lot of people have second thoughts when buying a new car, thinking that they don’t have enough for a down payment.

3. Improves the affordability.

4. Encourages cash flow management.

5. Ensures that the large offset amount as the last payment, giving the borrower a wide range of options to choose from.

6. Gives the ability of financing top-end vehicles instead of a base model.

Whenever the Balloon Payment fails because of unforeseen circumstances, the following options can be made:
1. Pay in lump sum.

2. Set the current assets for sale, and use the proceeds to pay out the Balloon Payment, and finalise the loan.

A finance lease has made an impact on balloon amounts executed by the Government.

Although balloon repayments are elective in nature and the amount is limited to the maximum amount based on the equipment/vehicle, as well as the term of the loan.

Oftentimes, this can be based on the lender’s estimate of the vehicle/equipment’s cost at the end of the current term. However, there will be instances where the size of the balloon will be restricted.

This is done in order to protect not only the clients, but themselves as well– no need to acquire a vehicle that’s worth less than the balloon.

That said, a balloon can be used on commercial facilities, but in some cases, some lenders don’t welcome this though on consumer car loans.

Contributor

This post was submitted by a contributor. Check out our Contributor page for details about how you can share your ideas on starting a business, productivity or life hacks with our audience.