This car financing, also known as balloon financing, is particularly popular when buying new cars or buying high-priced used cars, because it offers low rates during the term. However, it should be ensured at the beginning of the financing how the final installment can be financed. A variant is the 3-way financing, in which a down payment is added to the monthly and the balloon rate.
Advantages and disadvantages of balloon financing
- low monthly charge
- high interest and low repayment component
- Interest on the final installment accrues over the entire term
- Residual vehicle value may be lower than closing rate
- Financing of the final installment must be ensured.
Comparison of credit with and without a final installment
A car costs $ 25,000 and is to be financed through a car loan with a final installment over a period of three years. At the same interest rate, the monthly installment for a normal installment loan would be significantly higher than for a car loan with a final installment, since the installment loan must have the entire loan repaid after three years.
This does not mean that balloon financing is cheaper than a normal car loan.
For the same interest rate, higher costs for the loan with the final installment
Every USD repaid on a loan reduces the interest burden. If at a rate of $ 500 per month the repayment is $ 400 and the interest is $ 100, the total sum of the interest is lower than at a rate of $ 400, which is made up of $ 300 repayment and $ 100 interest. The different repayment rates are decisive: for the $ 100 that was repaid in the first variant, no interest will have to be paid in the coming month. With the accepted loan of $ 25,000, $ 24,600 remains for variant one and $ 24,700 for variant two after the first monthly installment.
In the next month, variant one only has to pay interest for $ 24,600, variant two has interest for $ 24,700. This means that the portion of the repayment in relation to the interest rate in variant one increases significantly more than in variant two at the second monthly installment. Over the months of repayment, the initially small benefit of higher repayments adds up to a substantial sum.
The final installment
A car loan with a final installment attracts with low monthly installments. These can only be achieved if the final rate is quite high. Anyone opting for a car loan with a final installment should know how to repay the rest before signing their loan contract. A normal installment loan can be used as follow-up financing or as a cash payment, for example because a savings contract is due or because in the meantime other reserves could be built up.
Longer term instead of final rate
Another way to keep the monthly installments low without taking out a car loan with a final installment is to extend the term. If the example loan of $ 25,000 is to be completely repaid in six instead of three years, the monthly installments for the long term are significantly lower than for the short term, but the interest costs are correspondingly higher. In comparison to a car loan with a final installment, the borrower knows from the start how long he has to pay which rate until the entire debt is paid off.