Car Loan With Balloon Payment Gets You Low Initial Repayments Then Lump Sums

There are many ways to buy a car – you can pay the full amount if you have the money, get a personal car loan from the bank or purchase it on finance from the dealer. Not many people have that sort of money in hand though and for most of us getting a loan is the most common way of purchasing a car. If you want to keep repayments to a minimum initially though, you should consider getting a car loan with balloon payment.

You might have come across a new car and fell in love with it or badly need to buy one immediately because of your circumstances and don’t have the money to pay it in full yet but you are expecting a lump sum in the near future. For example, if 6 months down the line, you are supposed to get some money you borrowed to a family/friend or you’re expecting a tax refund or will be inheriting a considerable amount of money, then you can opt to make a balloon payment for the car instead of having the spread the full cost equally over a certain amount of time through a personal loan or finance plan.

Advantages of balloon payments

The good thing about this type of loan is that your initial repayments are kept to a minimum amount which you can easily afford and the interest rates are low as well. Since it is a Personal Contract Purchase (PCP), the deposit required is a lot lower than traditional car finance. You are essentially paying a monthly fee to use the car for a fixed number of years and at the end of the contract, you will then be able to pay a lump sum known as the balloon payment to keep the car. The lump sum is the price that the vehicle is deemed worth at the end of your contract plan.

Disadvantages of balloon payments

This type of car finance is not for everyone though. The reason for this is because you need to have the money to pay back the loan at the end of the contracted period. If you’re not expecting a lump sum payment made to you or are not really good at putting money aside in a savings account, then you can find yourself in serious debt.

Is balloon car finance worth it then?

Say you wanted to buy a £10,000 car and want to pay it all back within 3 years. You would need to pay £324.93 each month with a standard loan. With a car loan with balloon payment, you can pay £150 a month and settle the remaining balance after 36 months. This means your monthly payments are significantly reduced allowing you to use the money for something else provided you make provision for the final lump sum payment afterwards.