Balloon Auto Financing

Let’s say you’re in the market for a new car. After picking out the car, you’re given three payment options by the dealership: leasing, purchasing the car with a traditional auto loan, or purchasing with balloon auto financing. You’ve decided leasing isn’t for you, so you’re left with a traditional auto loan and balloon financing. If you don’t have a down payment saved up, the lower monthly payments of the balloon loan and no down payment requirement look enticing, but you need to understand just how you’re getting this low monthly payment and how you’ll pay for it in the end.

Balloon loans are structured so you make lower monthly payments by moving what would be a sizeable down payment to the end of the loan. For example, you might be able to save $100 a month on your car loan with a final installment (also called the “balloon payment”) of $6,000 due at the end of the loan’s term. Because lenders (whether the dealership or a credit union) front-load interest on the payments, the final installment pays for the remainder of the loan’s principle. You can pay off the final balloon payment at once with cash (possibly from selling the car) or by re-financing with another loan and paying more in interest.

This type of auto financing can be a good option for those with good credit and a stable income who need a little more time to save up and pay off the loan, all while making lower monthly payments. Before you sign up, however, here are some things to consider first.

Like all financing decisions and options, balloon auto financing should be considered after thorough research and consideration.

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