Becoming the owner of a new vehicle is a luxury that not everyone can afford in view of the prices displayed in dealerships. To take advantage of the advantages of a recent and secure vehicle, many individuals are now tempted by the balloon credit formula.
Balloon credit: definition and principle
Balloon credit mixes certain characteristics of a loan and a rental and offers lower monthly payments than other financing solutions. Be careful however! The balloon credit does not make you the owner of the vehicle and will impose a certain number of constraints on a daily basis. It is therefore not suitable for all motorists.
What is a balloon credit and how does it work?
How to change your car with a balloon credit?
As its name does not indicate, a balloon credit is almost entirely equivalent to a vehicle rental contract. The dealer provides you with a new vehicle and you pay, in return, monthly payments for a variable period ranging from 12 to 48 months. These monthly payments only reimburse the interest due for the loan of the vehicle, calculated according to an interest rate defined in the contract: you are therefore not the owner.
It will most often be necessary, moreover, to pay you at the start of the contract a more or less substantial personal contribution, ranging from 10 to 20% of the total cost of the vehicle.
Beyond appearances, the balloon credit still remains a credit. You can notably decide to proceed to its total or partial prepayment at any time. In the event of partial repayment, your future monthly payments and / or the total duration of the loan will be adjusted downward.
Why finance my vehicle with a balloon loan?
Balloon credit is characterized by its simplicity, from its implementation to the end of the contract. Thanks to lower monthly payments, the motorist can benefit from the security of a new car, in perfect condition and with the desired options.
In addition, at the end of the rental period, four solutions are available to you:
- If you wish to keep the vehicle and become its owner, you can buy it for a sum which was defined when the contract was signed. This cash value is called the “balloon”. Taking out a classic car loan can then be considered to raise the necessary amount.
- If you cannot afford or do not want to buy the vehicle, you can return it to the dealer and receive a balance from any account. You are then free to take out a new balloon credit for another vehicle if you wish.
- If you think you can get a good price on your own, you can also resell the vehicle and use the proceeds to then reimburse the balloon.
- Some contracts, finally, allow you to extend the rental for one or two additional years.
Do you want to own your vehicle?
Do you already have one or more credits in progress and wish to finance the acquisition of your vehicle ?
You can claim credit consolidation !
By opting for this financing solution, you acquire your automobile while reducing your debt ratio.
Our experts support you in order to find the financial solution suited to your situation.
What is the difference between balloon credit and LOA?
LOA (rental with option to buy) is quite similar to balloon credit. Indeed, in both cases, the motorist is the tenant of his vehicle. The main difference between these two types of financing is the initial contribution. When taking out a balloon credit, it is compulsory to bring a certain amount, between 10 and 20% of the price of the vehicle, which is not necessarily the case for rental with option to buy.
The latter can be carried out with or without input, according to the needs of the driver and the dealer’s proposals. However, providing a contribution reduces the amount of monthly rent to be paid. It is therefore important to find the right balance.
Example of balloon credit
Here is a typical example of taking out a balloon loan compared to a conventional loan:
- price of the new vehicle: $ 36,500;
- contribution: $ 5,000;
- duration of the contract: 24 months (2 years);
- rate: 3.90%.
The monthly payment to be paid by the tenant is then $ 508.01. For comparison, a conventional loan would generate loan maturities of $ 1,366.48 per month over the same period. To achieve a comparable monthly cost with a balloon loan, conventional credit should be made over 70 months (i.e. almost 6 years).
What are the advantages of balloon credit?
The main advantage of balloon credit is financial. For an equivalent vehicle, the monthly payments to be paid will be much lower in the case of a balloon loan than in that of a conventional loan. No wonder, since in the second case you become the owner of the vehicle and must assume its depreciation. Concretely, and if you are not attached to the ownership of your means of transport, you will therefore have the means to drive in a more upscale vehicle by choosing the balloon credit.
This financing method, which is spread over a maximum of four years, also means that you will be driving with a new or very recent vehicle, a definite advantage that balloon credit and LOA have in common (rental with option to buy). Hence an additional comfort and well-being at the wheel, but also less maintenance and repair costs to fear.
A driver who appreciates recent vehicles and the flexibility of the formula can fully find his account by chaining balloon credits every two or three years, without ever paying the cash value.
What are the constraints of balloon credit?
Once you have subscribed to the principle of balloon credit, you will probably have a hard time getting out of it to become a “classic” vehicle owner. The cash value, at the end of the rental, is generally quite high, and does not reflect the real value of the vehicle.
Its driver therefore has every interest in giving it up and taking a new vehicle via a new balloon credit, while sacrificing a new personal contribution which will not be returned more than the previous one!
At this point, the driver who would have preferred a classic car loan is clearly a winner, since he will be able to finance part of his new vehicle with the resale of the old one.
Although you do not own the vehicle, you will also have to bear the maintenance costs, repair costs and of course the car insurance for the duration of the rental.
From the point of view of the dealer, finally, it is necessary that the car does not lose too much value during its rental. This is the reason why a maximum annual mileage, often quite restrictive, will be imposed on you. Any excess will require you to “buy back” the extra kilometers, for a dissuasive amount. Balloon credit, in other words, is to be avoided if you drive a lot or have little visibility on the use you will make of the vehicle!
Balloon credit and credit repurchase: a winning duo?
Do you have more than one credit term outstanding? You may have already considered the solution of the repurchase of credit, or grouping of loan. The purpose of this type of financing is to combine several debts into one. No more multiple and scattered maturities.
The borrower has only one monthly payment to pay. In addition to the administrative simplification of the management of one’s personal finances, a credit repurchase allows to regain air and purchasing power.
Do you have a balloon loan and don’t know if you can qualify for a loan consolidation? As with any other type of loan (home loan, personal loan, revolving credit, etc.), a balloon loan can be included in a group of loans. To do this, you just need to have your credit contract at the time of your credit buy-back request.