Balloon auto loans

Balloon Auto Loans A balloon auto loan is a type of car loan that one can take and pay back in small monthly payments for a certain period of time. At the end of the payment term, a larger sum known as a balloon is paid to the lender. When compared to traditional auto loans, balloon auto loans do not require down payments and carry low interest rates.

Balloon Loans and Amortization A traditional loan amortizes fully over its term, but balloon loans are partially amortized such that the monthly payments only cover the interest rates, but not the capital repayment. Thus, when the loan matures, a large sum of money has to be paid.

Advantages of Balloon Loans 路 Low interest rates and monthly repayments: Since the monthly payments are calculated based on the interest of the loan, borrowers pay very little every month. This gives them the freedom to save for balloon payment when the loan matures. 路 Down payments: One is not required to make any down payment when taking this loan to buy a vehicle.

Disadvantages The major disadvantage with this type of loan is that one has to be financially stable when the loan matures so they can afford the balloon payment. If not so, this loan is not for you as you may be forced to sell the vehicle to fund the final payment.

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