BUSTN

I have noticed that many automakers are offering a balloon style of payment.Can anyone elaborate on this?Is this form better than leasing?I honestly do not want to keep a car past 2-3 years.Thanks!!!

CUMan

Smaller than usual monthly payments (possibly interest only or interest plus a small principal payment) and then a large lump sum payment at the end of the loan term.

Better than leasing? It depends upon the value of the car at the end of the loan term. Your final payment may be more than the market value of the car.

I would certainly not recommend this as a way of buying a car. If you can't handle the payments on a normal installment loan, buy a cheaper car.

This type loan has been commonly used in the past in real estate financing. However, unlike most cars, real estate usually either holds its value or gains value (until recently, that is). When the balloon payment comes due, the homeowner can sell the house and pay off the loan, refinance into another balloon, or refinance into a conventional mortgage loan.

These options are not likely to be there in the case of a car. I doubt that any car will retain enough value to enable the owner to sell it and pay off a balloon loan.

BUSTN

Can the vehicle be turned in at the end of the term , i.e. like a lease return? Will I be responsible for the ballon payment at the end or a penalty?? I will most likely lease my next vehicle as, too many new cars and advances are being made.

CUMan

You would be responsible for the remaining loan balance when the balloon date occurs. If the car has enough value, you might be able to work out a deal to sell it back to the dealership for loan payoff. However, as I said earlier, no car is likely to hold value that well.

It would seem to me the only difference between a balloon loan and a lease would be the lack of a mileage limit. In a lease arrangement, the financing agency is taking the risk involving vehicle loss of value; however, they are putting limits on your mileage and hitting you with penalties if you exceed this. With a balloon arrangement, you are taking the risk involving loss of value.

BUSTN

Thank you for clarifying this for me! Now, I need to brush up on the "leasing" and money factors and all that other mumbo jumbo!