What Are the Pros and Cons of a Balloon Car Loan?

The primary benefit of a balloon car loan is low monthly payments, counteracted by the major drawback, the single large balloon payment to clear the loan when it matures. This type of auto financing can be useful for borrowers in certain situations, like people who plan to sell or refinance before the loan comes due. For others, it can potentially create a problem, as they may not be able to cover the balloon payment. Lenders with this option may also have other loans, and it can help to compare the monthly payments on different types, along with the total that will be paid out over the length of the loan.

In this type of financing, people make a series of low monthly payments, followed by one large “balloon payment” with the balance of the principal. The big advantage for borrowers is that the monthly cost of the car loan is much lower than with conventional loans. This can allow them to save money, dedicate funds to other activities, or balance monthly debt servicing more effectively. When the payment on the balloon car loan comes due, however, people need to pay a lot of money all at once, and if they are not prepared, they may default.

Drivers who only need a car temporarily and do not want to lease or cannot do so may want to consider a balloon car loan. The monthly costs of operation can be low, allowing them to have access to a car without sinking a substantial investment into it. This type of loan can also be useful for people who intend to refinance, although this can come with caveats. If a driver cannot refinance a car, the balloon payment will still come due, and could be a substantial obligation.

One significant problem with a balloon car loan is the rapid depreciation many cars experience as they age. Drivers could end up owing more than a car is worth before the term of the loan is over. If they try to sell the car to clear the balloon car loan, they may not get enough money to cover the balloon payment. Lenders have concerns about this as well, because people underwater on assets are more likely to default on their loans, so they may evaluate credit records carefully before offering balloon financing.

Buyers who are prepared to set aside money to make sure they will be able to afford the balloon payment may benefit from this kind of financing. Other drivers may want to reconsider. Low monthly payments can appeal to buyers who are not in good financial situations, but think they will be better off in several years. People in this position may want to ask themselves what they will do if they aren’t making more money by the time they need to start saving for the balloon payment.