Many people do not want or cannot buy a car for cash, and not having their own vehicle can be very problematic. A very popular car loan comes to the rescue in this situation. However, despite the fact that it is used by so many people, many do not know exactly what opportunities it offers. We have got used to the fact that we repay various types of loans in equal installments (i.e. the same amount over the entire repayment period), or decreasing installments (when the installments are the highest at the beginning and become lower over time). It is worth remembering that we can also repay a car loan using balloon installments – we can then use the term “balloon loan”. Just what is a balloon installment? Is this way of paying off the loan beneficial?
What is a balloon installment?
We can ask ourselves the question “balloon installment what is it?”. There is no denying that we hear more often about equal or decreasing installments. However, it is worth discussing the topic of balloon installments, because they can often be beneficial or best suited to our needs and financial capabilities. The balloon installment works so that it is very low for most of the loan period. We pay only interest, not the loan capital. He is repaid in full in the last installment, together with the remaining interest. Balloon installments will always be significantly lower than installments decreasing or equal to a loan granted on the same terms (with the same interest rate, commission, repayment period and other), of course, except for the last installment, which can be a challenge for the household budget.
What happens after the payment of the last installment?
The last installment is called the installment with redemption, because after paying it off we become the owners of the vehicle. The amount of this installment can raise concerns about whether we will be able to pay it back when the time comes. It is worth mentioning that the last installment of a balloon loan can be paid off once, but not only. It is also possible to divide it into installments, although of course this is a less financially advantageous solution.
It will probably involve the payment of another commission. However, if you do not want to continue using this vehicle, there is one more solution. At the end of the loan agreement, the car can be sold and the funds obtained in this way can be used to pay off the last installment of the balloon loan and to cover the own contribution in the next balloon loan. In this way, we can replace the vehicle already showing signs of use with a new, better one.
At the same time, we should not incur any additional costs, and the loan installment will remain at the same level. We may be afraid that we will be lossy because nobody will buy a car from us at the market price. However, the truth is different – when deciding on balloon installments, buying a vehicle through a dealer at the market price is guaranteed.
The cost of the balloon loan
People searching car loan offers may have noticed that the APRC of a balloon loan is larger than the APRC of a similar loan repaid in equal or decreasing installments. Why is it like that? We repay the loan capital only in the last installment, so throughout the entire repayment period the interest accrues all the time from the capital of the same amount.
This means that they will simply be higher than in the case of decreasing and equal installments, where in each installment some part of the capital is repaid. In addition, the interest rate on such a loan (and specifically the bank’s margin) may be higher, as granting it is quite risky for the lender. After all, for years, every month, the client receives only a small part of the entire debt, and he has to wait for his repayment of capital until the last installment of the loan.