A car loan with a fixed closing rate is very popular with car buyers. It is therefore not surprising that a car loan with balloon financing is the most common type of loan in this context. Balloon financing works in a similar way to leasing, in which small monthly installments go hand in hand with a high final installment. And it is precisely this type of financing that makes it possible for many people to be able to call a car their own.
How a balloon loan car loan works
The very favorable monthly installments are only possible because part of the loan is deferred. This part is then due as a calculated residual value at the end of the financing as a final installment. Even if none of these are repaid during the term, interest accrues on this amount.
This increases the loan duration of the entire loan. The total costs for balloon financing are therefore higher than conventional financing. Only the low rates hide the fact. But that’s just an optical effect. It is therefore worthwhile to calculate precisely in advance whether you want to opt for a car loan with balloon financing.
The rate should decide
In practice, you can usually only see the low monthly rates associated with balloon financing. It is often overlooked that the last installment can cause a cost shock. It is precisely this cost factor that should be considered more closely when deciding on a type of financing. Many car owners cannot afford this last installment. You either have to trade in the car or take out follow-up financing. There are additional costs that would surely be avoided.
It should therefore be considered whether the low monthly rates are really so important if a high residual rate threatens. Or whether you might prefer to pay a slightly higher rate every month, but avoid the cost shock in the end. Because evenly distributed loads can usually be mastered better than large one-time loads.
Even if these considerations might indicate that balloon financing is not the right way, this cannot be generalized. Because every consumer should decide for themselves which way they want to choose. And maybe an insurance policy expires during the financing period that brings in some money. The money could then be used for the last installment and let the balloon financing shine in a completely different light.