What is a Balloon Auto Loan

If you are searching for a good auto loan deal with affordable payments it is likely you will encounter a balloon auto loan, but may be unfamiliar with them. Whilst the monthly payments may appeal to you as being lower than average, it is important to understand exactly what a balloon auto loan is before considering one. The product is not for everyone and certainly wouldn’t be ideal for anyone new to financial dealings, but in some instances they can work well for borrowers. The main thing is to understand how they work before considering them.

Simply put a balloon auto loan is a monthly repayment loan which can be obtained with either no down payment or a low down payment, for the car you choose. They can be used to purchase both new and used cars. The monthly repayments will be low compared to many other auto loans available, and may typically be for 60 months. At the end of this agreed period the borrower then repays the remainder of the loan in full, with one ‘balloon payment’.

This type of loan is ideal for someone who perhaps wants to drive a car out of their own price range that is confident that at the end of the set repayment period they will have the lump sum available to repay the full outstanding amount. They could have invested the down payment they would have otherwise used to obtain an auto loan, and with sound investment it may now cover the full balance due. Also anyone knowing they have a lump sum due to them, by the time the balloon payment is due, could benefit from the lower costs of servicing a balloon auto loan repayment schedule.

It is also possible with balloon auto loans to not pay the full balance when due, but to instead refinance the loan. This will inevitably cost far more than the original loan agreement as by then the car will have depreciated in value and the balance due will include the unpaid interest which was applied to the outstanding principle. However the borrower is also free to sell the car and use the proceeds to repay the loan, trade the car, or in many instances return the car to the lender.

This type of balloon loan offers a viable alternative to those who may have considered leasing a vehicle. They can work out as an expensive option for those who automatically look to refinance the loan when the balloon payment becomes due.

Those who understand exactly how the product works and are prepared to either return, trade or sell the vehicle, or will be in a position to make the full payment at the end of the loan period, are the ones who will primarily benefit from this type of loan agreement. If you do opt for a balloon auto loan then check for a reputable lender who has a track record of issuing this type of loan, and be sure to establish exactly what options they provide at the end of the loan repayment term.