Car financing through balloon financing is in many ways more like a leasing contract for a vehicle than conventional financing for a car.
Only very small installments are paid over the entire term of the loan, which for the most part only cover the interest on the loan. The loan customer pays back only a small amount of the loan amount within the term of the loan, but at the end of the term he has to repay a large final installment to his lender. For the customer, this car loan with balloon financing initially appears to be particularly cost-effective because the small monthly installments appeal to it, but the final rate is usually very high and must be paid on over the entire term.
Small monthly installments and high final installments
As a rule, a car loan through balloon financing is only offered by car dealerships via their own house banks. This type of financing is rare in a conventional bank. As a result, customers are often tied to their car dealership if they want to use this form of financing. With this form of financing, the customer should plan in advance whether he can save money in addition to the monthly interest rate in order to pay the final rate at the end of the loan term.
However, if you can already foresee that you will have a larger amount available before the last installment when you take out the loan, you can very well purchase a larger and more expensive vehicle than you might otherwise currently be able to afford with this form of financing. Especially if, as is the case with many contracts of this type, no or only a very small down payment has to be made for the vehicle.
Residual value forms the final rate
Together with the car bank, the car dealer determines the residual value of the vehicle that is expected to be used when the loan expires. This residual value is then set as the final payment for the car loan with balloon financing. However, the customer pays interest on the residual value throughout the term. Therefore, a car loan with balloon financing is often slightly higher than conventional car financing in terms of the total cost.
This form of loan for an automobile is interesting because of the low monthly installments that the borrower has to pay. However, some car banks or conventional credit institutions offer further financing of the final installment. But mostly on different terms. With a positive development on the used car market, the borrower can of course also be lucky that his vehicle is significantly more valuable when the final installment is due. Especially when the mileage of the car has so far been lower than expected and the car has been very well maintained.