Balloon Payment Car Loan

Most of us don't know the dangers of a balloon payment car loan and what you should be aware of prior to signing your loan papers and taking your new vehicle home.

First you need to understand exactly what a balloon loan is. Balloon auto loans are designed so that when the loan term, or length of the loan, is finished the car is not paid in full. Instead you make one last, large, balloon payment to complete the terms of your loan. Until this payment is made you vehicle is not paid in full. Balloon loans keep your monthly payments lower. In addition these payments are mostly for the interest. When your balloon payment comes due you are usually paying off the principal of the loan. So what are the dangers?

A balloon loan is a good option if you absolutely need to keep your monthly payments low knowing that towards the end of the loan you will have the money to pay off the balance. Additionally balloon loans are an option for those people who absolutely need a new car but have no money for a down payment. Still you need to be sure that at the completion of your loan, 3 to 5 years from now, that you are driving a vehicle that is worth paying off. Paying $7,000 for a vehicle you no longer want isn't worth that amount can be difficult to deal with.

Aside from having a car you want to pay a large sum of money for you really need to plan for the balloon payment in advance. Saving monthly, or investing some money in order to make the balloon payment is extremely important. You also need to consider that refinancing a balloon loan can be difficult making your decision that much more important. It may be possible to extend the length of your balloon loan at the end of the term but it is not guaranteed. If you do refinance you could end up extending the amount of time you are paying on your new car from 3 to 5 years to possibly 5 to 7 years, or even longer.

Not having the money for your balloon payment at the end of the loan is really the worst-case scenario for the lender. If you miss your payment, cannot make arrangements, or cannot refinance you may lose the car even after you paid the interest for all those years. Even if you have the option to buy the car back you still have to come up with the principal to do so. Under a normal loan if you lost your car towards the end of the term you could buy it back for far less than you would if you had a balloon loan.

Balloon loans can be extremely beneficial to the right people but you should be aware of the dangers. More so than any other loan you need to have a plan to take care of the balloon payment ahead of time. With careful planning and proper research you may be able to avoid the dangers of a balloon loan.