The balloon financing is a credit variant especially for the car purchase. It differs in some respects from classic leasing and is especially interesting for low-income earners.
This is how balloon financing works
Simply put, balloon financing is a type of loan that consists of low installments and a higher final installment of maturity. It is usually used only when buying a car, which is due to the special options. So mostly two models are offered: First, the balloon financing with low installments and subsequent payment of the remaining sum. On the other hand, the balloon financing, at the end of the vehicle is sold directly. The amount earned is then used to pay off the remaining loan, with some borrowers also directly closing the next balloon loan. This model is especially popular with companies and the self-employed.
The benefits of balloon financing
A big advantage of balloon financing are above all the low rates and the comparatively cheap down payment. As a result, little start-up capital is needed to finance a car. In addition, interest rates are usually more attractive than a traditional installment loan. This is possible through the close cooperation between dealerships and banks. Last but not least, the method of financing also makes sense because the car can be sold back to the dealer after the term. This makes balloon financing a favorable alternative to leasing. However, as new cars quickly lose value in the early years, such a loan makes sense only for used cars. If you want to keep the car, this problem does not have, but it has to live with other disadvantages.
The disadvantages of balloon financing
The disadvantages of balloon financing are particularly evident when the borrower wants to keep the vehicle after the end of the term. Then the conditions are often much worse than at the beginning and the installment payment is often over years. Also when selling the vehicle, there are some disadvantages. Thus, despite the installment payment usually a certain amount of rest must be applied, which can vary greatly depending on the vehicle market and previous down payment. Especially if the car is damaged during the financing, a high loss of value threatens.
The benefits can be very quickly disadvantages. It therefore makes sense to plan the financing well and, in the best case, to find a buyer for the car in advance. Then the balloon loan is an option especially for low-income or irregular income people. For all others, alternatively, a three-way loan, which offers more collateral and the bottom line is usually cheaper.