What Is a Balloon Auto Loan? How Does It Work?
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What Is a Car Loan With a Balloon Payment?
How Balloon Auto Loans Work
Balloon Auto Loans vs Traditional Auto Loans
The loan amount is $40,000. The loan’s term is 48 months. The interest rate is 4.50%. (Note that a lender may offer different interest rates for auto balloon loans and traditional auto loans. In fact, loans with a balloon payment tend to be a higher risk for lenders, who therefore may charge a higher interest rate. But, for the sake of comparison, we’ll assume the rate is the same.)
Traditional Auto Loans
Balloon Auto Loans
Auto Balloon Loan vs Leasing
Balloon Auto Loans Pros and Cons
Balloon Auto Loan Pros
Up until the last payment, the amount owed is lower than with a comparable traditional loan. Depending on how the lender structures the loan, you may be able to sell the vehicle and use that money to make the balloon payment. You’ll have more cash in hand (until the final payment is due), which can help with cash flow. You could take the difference between the traditional payment ($912 in our example) and the balloon one ($456 in our example) and save or invest those funds. Because payments are lower, it’s more likely that you’ll be able to meet the monthly obligation.
Balloon Auto Loan Cons
It may be challenging to make the final payment. Interest rates may be higher. Not making the balloon payment can hurt your credit scores. The smaller payments you’re making mostly go to interest, which can put you in an upside-down situation (where the vehicle is worth less than what’s owed on it) if you try to sell or refinance the car when the balloon payment is owed. Because the pre-balloon payments are much smaller than they would be with a traditional loan, it can be tempting to spend more than you can afford on the vehicle.
Is a Balloon Payment Car Loan Right For You?
You’re expecting additional income to be available when the balloon payment is due. Investments you own will mature before the balloon payment is owed. You have the money to make the higher payments, but you appreciate how the lender is carrying the deficit for you during the loan’s term. You don’t have much money for a down payment, but you can meet the monthly car payments (and will be able to manage the balloon payment).
Requirements for Balloon Payment Auto Loans
Have steady employment and an income that demonstrates to the lender that you can meet the car payments Have a credit score that meets or exceeds the individual lender’s standards
Other Ways to Lower Your Car Payment
The Takeaway
About the Author
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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