Friday, November 15, 2019

Is a car loan with final rate makes sense?

Man sits with a clipboard and pen in a car and signs a contract

Balloon financing or final installment financing is common practice, especially when buying a car. It impresses with small monthly installments – thanks to a large final installment. 

Small monthly installments and a large final rate sound very tempting at first, but this can certainly have its pitfalls.

Three way financing: car loan with final installment

A final installment financing, as the balloon financing for car purchases is also called, works as follows: You buy a car on loan with a maximum maturity of 48 months and pay monthly installments. At the end of the repayment term, you have three options:

  • You pay the big final installment from your reserves.
  • They are raising new funding to settle the final installment.
  • You return the car to the dealer for resale.

Therefore, a balloon financing is basically only for cars, because the final installment is based on the predicted residual value of the car. The turn is made dependent mainly on the mileage. Other goods, such as furniture or real estate, have only a small value or no well-organized market for secondary utilization at the end of the financing and therefore are not suitable for balloon financing.

Balloon financing usually more expensive than installment credit

Balloon financing usually more expensive than installment credit

When you complete a car loan, you always get monthly loan installments. For a car loan with a final installment, monthly payments are up to 50 percent lower than a classic installment loan. Overall, you pay for the car with a final installment but usually more. The reason: The high closing rate will earn interest over the entire term. So quickly come together several hundred euros in interest costs.

Even more expensive can be the balloon financing of the car when one of the following occurs:

  • You can not pay the final installment and have to take out a new loan. In the meantime, interest rates may have risen.
  • You have exceeded the agreed mileage and must compensate the dealer accordingly, because the residual value is lower than originally planned.
  • You have to sell the car to pay the final installment. The current market value is lower than the closing rate.

For whom is balloon financing worthwhile?

For whom is balloon financing worthwhile?

Balloon financing is useful only in a few cases, namely if you …

  • … can certainly expect a larger sum at the end of the repayment term, for example the payment of a life insurance, but want to preserve as much financial flexibility as possible during the financing period.
  • … anyway intend to repel the car after a few years. But even this can – depending on the market situation – turn out to be a loss.

Since you have to meet the same credit requirements for balloon financing as you would for a installment loan, in most cases you can do much better with a standard car loan at constant installments over the entire term.

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