Refinancing Your Car Loan Can Be a Solution to Making Your Balloon Payment
Many Innovative Funding Services (IFS) customers’ are interested in a lower monthly car payment that frees up money to pay other bills or to build savings. That is very likely how some of them ended up with a balloon car loan – the hope was they could keep their payments low until their financial situation improved.
Then, it was time to make the balloon payment.
Robert Janssen, Finance Advisor Manager at IFS says he’s dealt with a few deals where the customer had a balloon payment coming up but didn’t have money for the final payment and selling or trading the car didn’t make sense.
He worries these types of loans could be misunderstood – that the buyer doesn’t really know what they’re getting into it when they sign the dotted line.
First, what is a balloon auto loan?
A balloon auto loan or residual payment loan is a loan in which monthly payments are made for a certain amount of time, ending with a lump sum payment to the lender at the end of the loan term.
With a balloon loan, the buyer pays interest on the vehicle over the loan term and the principal in a lump at the end of the term. With a traditional auto loan, you pay principal and interest throughout the loan term.
Does your head hurt trying to figure this out? Here are some other thoughts about balloon auto loans that may help.
Balloons are NOT Car Leases. Balloons Are…Swords?
Some compare these types of auto loans to car leases. Janssen says it’s not that simple.
“It’s a double-edge sword,” Janssen says. “With a balloon, you own the vehicle, and don’t give back it to the dealer at the end of the term.
The disadvantage of a balloon loan is it is a loan – you are buying the vehicle. You can’t just give it back to the dealer if you can’t pay the final payment or if it isn’t a good deal like you can with a leased car.
Balloons Are Not a Safe Bet. Balloons Are a Gamble.
Janssen’s takeaway? Be careful.
“If I look at purchasing a car as an investment, leases are kind of like hedging,” he says” “and balloon loans are more of a gamble. You’re betting that either the vehicle value stays high [so you can sell or trade it in], or that you’ll have the funds available in the future [to make the final payment].”
Before you place your bet to get a lower monthly car payment, ask yourself these questions:
- Will I really be in a better financial situation when the lump payment is due?
- What will the car’s value be in three to five years? Will it be strong or depreciate dramatically?
- How do I feel about owing more than my car is worth at the end of the loan period?
- If I cannot refinance the balloon loan into a new loan, what will I do?
- Not making the balloon payment will damage your credit score. Period.
Refinance Your Balloon Car Loan to Redeem a Bad Bet.
When the final payment is due, you have three options to get out of a balloon car loan. You have to pay, refinance the final payment, or you can roll the payment into a new auto loan on another vehicle.
Most IFS customers choose to refinance their final payments because it saves time and frees up your cash.
Refinancing is a pretty quick process, and since you own the car and are already driving it around, you’re basically just doing some paperwork.
With IFS’s loan services, you don’t even have to go into a dealership, bank or DMV. And you get some control back. Financing that final payment also means you can trade in or sell the car when it does have equity – but on your own timeline rather in the face of a balloon auto loan deadline set to burst.
More importantly, refinancing this type of loan into a traditional car loan allows you to turn that large payment into smaller payments paid out over time, freeing up a lump sum of cash you would have otherwise paid out.
Janssen says, “Instead of paying thousands of dollars at one time on a depreciating asset, you can keep that money in your bank account and only pay a little bit at a time. If an emergency happens (medical comes to mind), you have that cash available to absorb that blow, rather than relying on credit cards, other loans, or in the worst case, bankruptcy.”