The balloon payment has been a staple of auto financing solutions for many years. This is due to the flexibility and support that it lends to the consumer.
In a world where taxes alone can cost Australians $30 per tank, any cost-saving measure to the daily budget is welcome. In this article, we examine how the balloon payment works and why it’s so effective against traditional financing methods.
Auto Financing Options
There are a few different options available when it comes to taking out a loan to finance a car. The first is going through a traditional bank. This option typically offers the lowest interest rates, but the approval process can be lengthy and complicated.
The second option is financing through a dealer or paying cash on a private purchase. This can be a convenient option, but it is important to be aware of any interest points that you may be losing due to markups. If it results in a lower payment, you may still choose to go this path.
The third option is financing through a balloon payment. This type of loan can keep your payment very low as you work to pay off the interest of the loan during the prescribed term. (A great option when you consider it costs the average Australian $214.85 per week to own and operate an automobile.)
You then have the option of paying off the loan amount at the end in one lump sum (the balloon) or refinancing the remainder of the loan for an added period.
What Is a Balloon Loan?
Balloon payments are often used in loans as a way to lower the monthly payment amount. By deferring a portion of the loan until the end of the term, borrowers can enjoy lower payments throughout the life of the loan.
Balloon payments can also be used to manage cash flow or where there is a possibility that the value of the underlying asset may increase over time. For example, a balloon payment on a car loan may be used where the value of the car is expected to increase during the term of the loan.
Balloon payments can also be beneficial for tax purposes as they may allow for some of the interest to be tax-deductible. Overall, balloon payments can be a useful tool for borrowers looking to lower their monthly payments or manage their cash flow.
Balloon Loans vs. Traditional Loans
Traditional loans may be an option for individuals with stellar credit and few debt-to-income ratio problems. That’s because a traditional loan can get you the prime rate over a set period. However, the accelerated rate of repayment can lead to higher fixed payments.
Higher fixed payments do not leave you a lot of wiggle room if you run into cash flow issues or unexpected financial emergencies. Balloon loans, on the contrary, have monthly payments that are often 60% lower than traditional loans with similar terms.
The balloon payment at the end of the loan can be an issue if you have not planned for it, but it does give you the option to refinance or sell the asset before the final payment is due.
Stay On The Road Affordably By Refinancing Your Balloon Payment
Choosing a balloon payment is a good option for individuals who want to hold on to more of their paychecks and have some flexibility of ownership. If that sounds like you, take heart!
C1 Finance helps consumers secure and refinance these types of loans regularly, and we’re eager to assist. Contact us today to get started!