There are several finance options available to the car buyer. These range from straight finance deals to more complex balloon payment options. Straight finance deals are fairly straight-forward, you normally put down a deposit and then pay the remainder in equal instalments. Balloon payment plans are more complex.
What is a Balloon Payment?
Typically in a balloon payment scheme, a portion of the debt is kept aside and your monthly instalments are worked out on the remaining reduced portion. The portion initially kept aside falls due at the end of the term.
Benefits of a Balloon Payment Plan
The basic idea behind offering a balloon payment is to make the monthly instalment more affordable. You can thus afford a more expensive car but still make the same payment as you would on a less expensive model.
Drawbacks of a Balloon Payment Plan
The major drawback is that at the end of the term you will be left with a huge outstanding balance to pay. If you cannot come up with the funds, you will have to trade in or refinance the car. If you keep taking a balloon payment plan, you may end up never actually owning your car. The downside from a financial perspective is that you will pay interest on the full outstanding amount for the whole term, including the monies set aside as a residual payment.
This means that this works out to be a farm more expensive purchase in the long run even if you can pay the residual payment at the end of the term. From a personal perspective, you have to ask yourself why you are considering this form of financing. It is generally because you cannot afford the higher instalment.There are times when this is the only way to get a suitable car but you should consider carefully what you would do if the interest rates went up. It is never a good idea to buy at the top of your budget without leaving a little bit of a cushion in case interest rates increase.
In the end, balloon payment plans have been found to be the right option for some people – you need to decide if they are the right option for you.