The pros and cons of a balloon payment
So you're looking at purchasing a car on finance and the dealership in question has offered you a balloon payment, what does this mean? In short, a balloon payment allows you to take a portion of the initial vehicle purchase price and set it aside, meaning that you are essentially financing a lower amount, reducing your monthly repayments. The portion of money removed from the initial cost price of the vehicle is then owed at the end of the payment. Let's take a look at the pros and cons of a balloon payment.
Pros
- It lowers monthly premiums
- Usually does not require a deposit
- Allows you to drive a more expensive car for a lower amount in the story term
- Frees-up capital
- You may be able to re-finance the balloon payment at the end of the initial loan
Cons
- Lump-sum owned at the end of the loan term
- Sometimes the lump sum cannot be financed
- In the event of a default, you may end up selling the vehicle and still owning a large sum of money on it
- Can create a cycle of more balloon payments and excessive debt if not managed well
