Balloon Payments & Why You Should Avoid Them

Balloon Payments: What’s right for you?

There’s no one right way to go about financing a vehicle purchase; there’s just what’s right for you at the time. That being said, balloon payments get a bad rap in the vehicle financing world and we’d like to take a look at why:

balloon payments - wp motors

Cons of balloon payments when purchasing a vehicle:

  • You end up paying much more interest over the longer period of time
  • Residual payments or balloon payments may also be subject to interest that piles up unnoticed until the balloon payment is due
  • If you have opted for a balloon payment finance scheme in order to pay for your vehicle you may have greater trouble or be subjected to stricter/harsher terms should you decide to refinance

Ownership versus non-ownership residual/balloon payment schemes

In an ownership balloon payment scheme the owner of the vehicle is essentially paying the vehicle off monthly in a hire-purchase scenario in which said owner is responsible for making the residual or balloon payment at the end of the repayment term. The individual retains ownership of the vehicle.

In a non-ownership balloon payment scheme a banking institution or lender through which a loan is facilitated becomes responsible for the balloon payment at the end of the repayment period, at which point the bank/lender sells the vehicle – that is how the bank finances the balloon payment. In effect, the bank or lender owns the car and the driver leases it from them. This kind of agreement is also subject to a number of terms and conditions; for example, the lender may put a maximum cap on the mileage of the vehicle and the driver may end up paying a per kilometre penalty should they have exceeded the maximum mileage come the time for resale of the vehicle.

balloon payments - wp motors

That is not to say that an individual who purchases a vehicle using the ownership balloon payment scheme cannot sell the vehicle in their personal capacity in order to cover the balloon payment at the end of the repayment period – many vehicle owners choose to finance their vehicles this way.

That being said, balloon payments really aren’t all bad despite their bad rap.

Pros of choosing a balloon payment finance scheme when purchasing a vehicle:

  • You can buy the car you need when you need it and pay lower monthly installments while you save for the lump sum at the end (this works especially well for those who earn the bulk of their income seasonally, or who have an investment maturing around the same time a lump sum is due).

balloon payments - wp motors

Looking To Buy Quality Used Cars At Affordable Prices – Visit WP Motors

Sign up for our Newsletter

Click edit button to change this text. Lorem ipsum dolor sit amet, consectetur adipiscing elit