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Auto Ballon Payment

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grillandwinemaster
Valued Contributor

Auto Ballon Payment

Does anybody here have experience with auto balloon payments? How much do they help with keeping your payments low? Can these work with used vehicles? What lenders are offering these type of loans? What are the pros and cons? 

 

 

Thanks in advance!


Current Scores 3/2016 Equifax 676 Transunion 697 Experian 648 Goal Scores: 720's accross the board. Gardening Goal: 3/2017
Message 1 of 10
9 REPLIES 9
Anonymous
Not applicable

Re: Auto Ballon Payment

https://www.penfed.org/Payment-Saver-Auto-Loan/

 

Penfed payment saver loan.  They have a payment saver calculator on their page too if you want to see what your payment would be.

Message 2 of 10
Anonymous
Not applicable

Re: Auto Ballon Payment

Pro: you have a much lower payment for 35 or 47 or whatever months, than you would if you were buying on a standard loan.

 

Con: that last month's payment is "the rest."

This means that you had better have planned and saved ahead to make the payment, because otherwise you're in for a shock.

The vehicle, in its 36th or 48th month or whatever, is more than likely not going to be worth anything close to the remainder balance (that last balloon payment).

So a quickie refi to cover that ballon amount may simply not be possible.

 

If you have discipline, and can set aside X amount of cash each month on top of your "low" car payment, into an account that will bear interest or some sort of return on your money in a few years, then you will make the balloon with no pain, and life will carry on.  This can be good for a vehicle you fully intend to keep after you've paid it off, since you'll have basically no equity in the vehicle itself until that last payment is made.  The "low" payments you make each month before that will be loaded with primarily interest, and the majority of the principal will sit in the balloon payment until the very end.  Whatever interest or other returns you made on the money while you kept it set aside in preparation for making that payment, that is your gain in this situation - you'll have a paid-off car, and a little extra interest on the money that you would not have gotten if you made standard car payments for all of the months in between.  But it requires forward planning and the ability to make yourself adhere to it.

 

If you do not have that kind of discipline (many people don't, of course), or if you want to be able to trade in the vehicle at any point before the balloon is paid, then you might want to look at standard financing.  The monthly payments will be higher, of course, but progress toward positive equity will be faster (allowing trade-in sooner), and you won't have to be responsible on your own for making progress toward saving up your balloon payment.

Message 3 of 10
grillandwinemaster
Valued Contributor

Re: Auto Ballon Payment

Thanks CreditGuy, for that link.  It sucks that trucks and suv's are excluded.  Those are the vehicles that would benefit the most, since they can bee target pricey.


Current Scores 3/2016 Equifax 676 Transunion 697 Experian 648 Goal Scores: 720's accross the board. Gardening Goal: 3/2017
Message 4 of 10
grillandwinemaster
Valued Contributor

Re: Auto Ballon Payment


@Anonymous wrote:

Pro: you have a much lower payment for 35 or 47 or whatever months, than you would if you were buying on a standard loan.

 

Con: that last month's payment is "the rest."

This means that you had better have planned and saved ahead to make the payment, because otherwise you're in for a shock.

The vehicle, in its 36th or 48th month or whatever, is more than likely not going to be worth anything close to the remainder balance (that last balloon payment).

So a quickie refi to cover that ballon amount may simply not be possible.

 

If you have discipline, and can set aside X amount of cash each month on top of your "low" car payment, into an account that will bear interest or some sort of return on your money in a few years, then you will make the balloon with no pain, and life will carry on.  This can be good for a vehicle you fully intend to keep after you've paid it off, since you'll have basically no equity in the vehicle itself until that last payment is made.  The "low" payments you make each month before that will be loaded with primarily interest, and the majority of the principal will sit in the balloon payment until the very end.  Whatever interest or other returns you made on the money while you kept it set aside in preparation for making that payment, that is your gain in this situation - you'll have a paid-off car, and a little extra interest on the money that you would not have gotten if you made standard car payments for all of the months in between.  But it requires forward planning and the ability to make yourself adhere to it.

 

If you do not have that kind of discipline (many people don't, of course), or if you want to be able to trade in the vehicle at any point before the balloon is paid, then you might want to look at standard financing.  The monthly payments will be higher, of course, but progress toward positive equity will be faster (allowing trade-in sooner), and you won't have to be responsible on your own for making progress toward saving up your balloon payment.


Thanks HMW for your detailed post, and information.  Definitely a lot of things to consider.  


Current Scores 3/2016 Equifax 676 Transunion 697 Experian 648 Goal Scores: 720's accross the board. Gardening Goal: 3/2017
Message 5 of 10
grillandwinemaster
Valued Contributor

Re: Auto Ballon Payment

Does anyone know of other lenders doing this type of loan?

 

Almost sounds like the "bad mortgage" days of the past...


Current Scores 3/2016 Equifax 676 Transunion 697 Experian 648 Goal Scores: 720's accross the board. Gardening Goal: 3/2017
Message 6 of 10
jeffm4688
Frequent Contributor

Re: Auto Ballon Payment

Balloons tend to work if you know you won't have an issue making the balloon payment at the end or have no problem making the final payment minus any negative equity. The amount of balloon is largely dependent on the type of vehicle and the lender's requirements.

 

I know many people with balloons and they haven't had an issue with them because they understand the final payment is due at the end of the term. The final payment is usually based on ALG residual value and in some cases it is 100% of that value(penfed) or a max of 80-90% residual value. ALG is usually based on wholesale pricing as far as I understand and can tell.

 

I have two vehicles on balloons (one business one personal), my mom has her vehicle on one(and she bought used), my brothers' first car was a balloon and I have a friend or two who found them and choose them as well. I had a couple sales guys whom I've spoken too in the past and have used balloons without issue. Ironically in some cases, balloons can have lower interest rates. I qualified for almost 1% lower on my truck due to the balloon having a lower term through my local CU, doesn't make sense to me but I'm not complaining. 

 

Here are my examples with balloon payments :

 

2016 GMC Sierra Denali ->
MSRP : 61,100
OTD Price : $53000

Payment $540 (60 months)

Balloon payment : $24,9XX (residual is $35XXX) -> payments based on depreciation let me write off the truck through my business and then at the end i'll owe way less than if I leased, and the taxes are already paid for so if I decide to trade I get the credit, or if I buy I save on $2200 worth of tax. Lease payments would of been the same as I couldn't of gotten 20% off MSRP if I leased

 

2016 Chevrolet Camaro 2SS ->

MSRP : 47760

OTD price : 47700 (13K off MSRP buried 13K of negative equity on old vehicle, I was intending to pay this off when trading for another vehicle but ended up finding this car with the discount so traded for it)

Payment: $534 (60 months)

Ballon payment : $19,900 (I expect this to be high as penfed is 100% of ALG value, traded will probably yield negative equity and I expect to pay that off at the end when trading or make the payment and keep the car, selling privately is also an option and will probably yield the 20K)

 

My brother :

 

2015 Chevrolet Camaro 1LT ->

MSRP: 28700

OTD: 23300

Payment : $250 (60 months)

Balloon payment: $10,100 (will be due 3 months after he graduates from college, which is roughly 48 months from now & he already has 5K in the bank)

 

 

I'm not saying balloons are bad, but I do know quite a few people who have used it to buy very expensive cars(think 80K+) and I have a feeling they won't be prepared for the loan to end but I didn't recommend it for them and I advised against it but I can't make other people's decisions for them. The other part is, if you're not going to take care of it don't do a balloon as it definitely will not be worth it at the end.

 

A balloon can also be decent on high-end cars that don't generally depreciate a lot. Say the new GT350, according to penfed a GT350 has a residual of 19K where the regular GT has 17K which is almost laughable. I know the GT350 will depreciate but let me know where I can find a 5-year-old Shelby for $19K and I'll buy one tomorrow. In this example, I'm betting you'd have positive equity at the end. 

FICO 12/2015 - EX 692 TU 685

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What survived:
Amex HH - 1.5K | Amex Delta - 1K | Amex Bonvoy - 1.5K | Amex BRG - 3.5K | Amex BRG - 3.5K | Amex Business Cash- 2K | Amex Business Plus - 2K
Message 7 of 10
Anonymous
Not applicable

Re: Auto Ballon Payment


@grillandwinemaster wrote:

Does anyone know of other lenders doing this type of loan?

 

Almost sounds like the "bad mortgage" days of the past...


Quite a few of the luxury car manufacturers like BMW and Mercedes offer balloon type finaning.  In those cases it can be a viable option because they hold their value so well it is not difficult at all to refi once the balloon payment is due.

Message 8 of 10
Anonymous
Not applicable

Re: Auto Ballon Payment

I literally just asked the same question in auto approvals after seeing Jeffs post. Penfed offers balloon loans as previously stated. 

Message 9 of 10
iv
Valued Contributor

Re: Auto Ballon Payment


@jeffm4688 wrote:

Ironically in some cases, balloons can have lower interest rates. I qualified for almost 1% lower on my truck due to the balloon having a lower term through my local CU, doesn't make sense to me but I'm not complaining. 


Not too surprising, really.  Keep in mind that the rate can be lower on a balloon, but since the balance that rate is applied to will stay higher throughout the term of the loan, the actual interest paid can be the same or higher than with a fully-amortized loan.

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Message 10 of 10
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