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Balloon auto loan
Balloon auto loan is a type of loan that allows you to pay smaller monthly payments with the balance being paid in one large or ‘balloon’ payment at the end of the term of the loan. Balloon auto loan payment then refers to the large payment you make at the end of the loan. This type of auto loan payment is sometimes offered by auto loan companies.
Balloon auto loan payment differs from the usual auto loan payment in some respect. In the usual auto loan payments you get to pay only the interest for several years. As the auto loan amortization progresses, the monthly payments you make are applied more and more to the principal. When the loan term ends, you owe nothing. Balloon auto loan payment, on the other hand, the loan is not fully amortized and the principal are not paid over the life of the loan. Since the monthly payments using the balloon auto loan method are minimal, the monthly payment you make are actually just applied to the interest or interest plus partial principal. So when the loan term ends, the balance needs to be paid in full hence the need to make a large or ‘balloon’ payment.
Borrowers sometimes avail of balloon auto loan in order to make their monthly payments more affordable and to be able to save money to make the final ‘balloon’ payment at the end of the loan term. Balloon auto loan though could have its disadvantages. For instance, you can never tell how the interest will change through the years. And you can never be sure that you will have the money for the large payment when the loan term expires. Some auto loan companies will confiscate the vehicle if you cannot make the balloon auto loan payment. In cases where they need to make the balloon auto loan payment some borrowers have to avail of loan refinancing or they resort to obtaining another loan or even sell the vehicle in order to pay the balloon auto loan rate.
Some companies like GMAC offer auto loan options that allow you to make balloon auto loan payment. GMAC SmartBuy program lets you own your vehicle and pay lower monthly payments. Low payment is possible because you pay for the portion you expect to use of the vehicle each month plus the finance charge. At the end of the contract you can choose to make a final balloon auto loan payment or return your vehicle with a $250 disposal fee. Other companies let you avail of balloon auto loan payment when leasing a vehicle. You can make a balloon auto loan payment at the end of the lease if you intend to buy the vehicle.
For borrowers, it is always good to play it safe. As much as possible, balloon auto loan should not be availed of. Unless you are sure that at the end of the term you can produce the money needed for the large payment. Or, end up losing your vehicle.
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