Balloon financing or final installment financing is carried out with a loan that is not fully repaid during the agreed term. This leads to low monthly repayment rates. At the end of the term, however, a large amount remains, the final installment, which is also known as a balloon. Depending on the term, the balloon is usually up to 50%. The final installment must be paid immediately after the end of the term, either with own funds or through new borrowing.
What are the advantages and disadvantages of a balloon loan?
The advantage is the low monthly rates. A balloon loan is always more expensive than a comparable installment loan because the loan is not fully repaid during the term. By the end of the term, interest must be paid on at least the entire remaining “balloon”. Another disadvantage is the uncertainty regarding the financing of the balloon. If own funds are insufficient, a new loan must be taken out for which the car buyer bears the interest rate risk.
What is the difference between balloon financing and 3-way financing?
3-way financing is a modern form of balloon financing. Borrowers have a choice: you can pay the balloon out of your own funds or with a new loan. In this respect there is no difference to conventional final installment financing. In addition, there is a third way of returning the vehicle. If this variant is selected, 3-way financing is similar to kilometer leasing with similar advantages and disadvantages.
What are the alternatives to balloon financing?
A normal installment loan is an alternative. If a dedicated car loan is chosen in which the financed vehicle must be transferred as security (delivery of the registration certificate part II), particularly low interest rates can be agreed. The different forms of vehicle leasing are another possibility. Mileage contracts are particularly suitable for private individuals.
Who offers balloon financing? Balloon financing is mainly offered by manufacturer banks such as VW, BMW or Mercedes. There are also some independent car banks such as Fine Bank, a subsidiary of Capital Lender. Independent car banks often work with dealers who provide credit when buying vehicles.