In Business Car Loan, Car, Car Finance, Loans, News

When it comes to buying a car, there are numerous financing options available and various ways of structuring loans to make them affordable for you. We here at iCREDIT can help you secure some of the best car loans on the Gold Coast.

One thing that many customers ask us about is balloon payments and how they work, so let us look at them here.

What Is A Balloon Payment? 

A balloon payment is a lump sum paid to the lender at the end of the car loan term to finish out the loan. In many ways, a balloon payment is similar to a deposit, except that whereas a deposit comes at the beginning, a balloon payment comes at the end.

When you have a lump sum remaining at the end of your car loan term, you are typically only required to make interest payments on part of the principal. Thus a balloon payment can  reduce the monthly instalments that you have to pay, making the car more affordable in the immediate term. In Australia, balloon payments cannot be more than 50% of the car’s purchase price.

What Are The Benefits Of Balloon Payments?

The largest benefit that accrues from a balloon payment is the lower monthly repayments which reduces pressure on your monthly budget, making it more feasible to purchase and pay off the car.

While balloon payments effectively function in the same way as an upfront deposit, the difference with a balloon payment is that it gives you the chance to actually own and drive the vehicle while you save up for the payment at the end. On the contrary, upfront deposits can prevent you from having access to the vehicle until you have saved up enough money. This makes balloon payments attractive because they allow you to get on with your life without having financial limitations hold you back.

Another big advantage of balloon payments is that they can be paid off by selling or trading in the car at the end of the term. In some cases, if you cannot afford the balloon payment, it’s possible to take out a personal loan to pay off the balloon payment, thereby giving you full ownership of the car while you repay the personal loan issued for the balloon payment over the coming months or years.

What Are The Drawbacks Of Balloon Payments?

The first and most obvious drawback of balloon payments is that there is a large lump sum owed, which many might not be able to afford. The large bill to pay to end your car loan term can be a nasty surprise if you have forgotten about it. Balloon payments can easily amount to tens of thousands of dollars, which few people have on hand, so it can come back to bite you.

Lastly, the depreciation of your vehicle means that the large lump sum at the back end of your loan term could result in you owing more money than the car is worth. This negative equity could affect your overall financial position and lead to a loss of equity in the long term.

If you need help securing car loans on the Gold Coast, speak to us at iCREDIT today. We can help you get the best deal possible!

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