What Is A Balloon Payment In A Car Loan?

If you’re going to get a car loan and are looking for suggestions from your friends, you probably already have listened to the phrase “Balloon Payment” plenty of times. Availing a balloon payment in a car loan can prove to be a counterproductive choice. 

Here is a brief introduction to balloon payment and all the possible benefits and drawbacks of this bold choice.

Definition:

    A balloon payment is actually a much bigger payment than your regular monthly repayment that you have to pay at the very end of your allocated loan period. This is a one-off payment that lets you decrease your monthly loan repayments considerably. Since this payment is considerably bigger than the rest of your payments, we call it the “Balloon” payment. Let’s consider an example.

For Example:

    Mike takes a car worth $30,000 on a 5-year loan, so, in the regular case scenario, mike would have to pay $500 as a monthly repayment for 60 months.

    But if Mike agrees to pay a Balloon payment of $15,000 at the end of this allocated 5 year period, he’d just have to pay $250 per month for 60 months straight. The interest rate would remain the same as it is calculated according to the net worth of your vehicle and the loan repayment period

Benefits:

    There are many apparent benefits of balloon payments for your long term goals (https://www.consumeraffairs.com/automotive/buy-car-with-bad-credit.html ). You can easily repay the loan in small chunks and pay a big amount at the end to manage your finances easily.

    Businesses are usually most benefited by the balloon payment method. Because they can file the interest they pay in the car loan as a business expense in their tax return. But you should always consult a tax expert before making a final decision.