Balloon payment car loans – What is it, and how can it help you?

Whether you are looking for a loan for a new car or you want to refinance your auto loan, a key factor to consider is having a balloon payment on the loan. The decision about balloon payment and its size can impact how much you pay each month on loan and how much you will owe when the loan comes to an end.

What Is a Balloon Payment?

Balloon payment refers to the lump sum amount that you owe the dealer once the loan term has come to an end. A balloon payment lets you repay a part of the loan over the term of the loan, thereby reducing your monthly payments. In exchange, you will give the lender a lump sum once the loan term has ended.

For example, imagine that a person wants to purchase a vehicle that will cost $40,000 over five years. They choose to have 25 percent of that loan, which is $10,000, like a balloon payment. Their monthly repayments will be lower because they repay $30,000 over five years. However, they will still need to give online payday loan the lender $10,000 as a lump sum at the end of the loan term.

A balloon payment can be an absolute dollar amount or a percentage of the amount borrowed. Other than leases, a balloon payment on a loan is optional. It is good to talk to a finance consultant to determine what is required to qualify.

Is a Balloon and a Residual Payment the Same Thing?

For practical purposes, there are some differences. Both processes involve paying a set amount at the end of the loan to reduce ongoing repayment during the life of the loan before its end.

However, residual payments are connected to car leases. It factors in the final value of the vehicle at the end of the lease and takes into consideration depreciation. A balloon payment is for car loans. They are a set dollar value or percentage paid at the end of the loan, which is not based on the vehicle’s value.

Reasons to Consider Balloon Payments

According to Lantern by SoFi, “Lowering your car loan payment can free up some cash.” This is true whether you are taking out a new loan or refinancing your auto loan with Lantern.

With a balloon payment, your monthly payments over the loan’s lifespan are lower. This can help with cash for the management and the affordability of the vehicle. It can also assist in maximizing the size of the loan.

Getting a car loan of any size is a financial commitment. It is good to talk to a financial specialist to determine how to find the right balance between your monthly payments and the balloon payment at the end of your term obligation if you use this option. There are several flexible finance products available that will suit your needs and help you get a dependable vehicle.