Balloon Payment Plan: Is It For Me?

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You’re shopping for a new, or new to you, vehicle with us at Steve Landers Toyota of Northwest Arkansas and you found the one: the perfect car. Now comes the financing. You have to choose between buying or leasing the car. 

However, there’s a third option for financing that could fit your budget better. It’s called a balloon payment. It’s more common for mortgages and business loans that it is for auto loans, and is probably why a lot of car buyers have never heard of it. Or maybe you’ve heard talk of the balloon payment plan but have no idea what it is.

A balloon payment plan is a residual payment loan, meaning you’re shelling out less cash for lower monthly payments up front. Monthly payments are made for the length of the term and at the end of the agreed-upon term with you and your lender, a lump sum payment is due. The buyer will pay interest on the car over the loan term and pay the remaining principal as a lump sum at the end of that term. Of course, if you put down a down payment that will help as well.

With a traditional auto loan, the buyer pays principal and interest throughout the loan term and, in doing so, builds equity in the car. With a lease, you don’t have equity, but you’re also not in danger of being upside down and can give the vehicle back to the dealership at the end of the term for something newer and flashier. 

With a balloon payment, you do actually have equity in the car, but there’s still that lump sum you owe to your lender at the end of your term. 

Depending on your financial situation, balloon payments can be a good move or a risky. With a balloon payment plan, you’re betting you’ll have the funds to pay off the lump sum at the end of the term, or that the vehicle’s value will still be high enough that you can sell or trade it in.

After the loan term is up, you have a few different courses of action to pay out the lump sum. You can pay it all off, roll the payment into a new loan on another car or refinance the final payment. 

If you’re still a little unclear about balloon payments, or if it’s a good option for you, give us a call or fill out our contact form. 

We can’t wait to serve you at Steve Landers Toyota NWA!

Categories: Finance