It is possible to secure a balloon payment auto loan, even if your credit is less than perfect.
Before you sign any auto loan contracts it is important to know exactly what a balloon payment is to ensure that you are making the right decision for your finances.
What is a Balloon Payment Auto Loan?
A balloon auto loan can be a good option for potential car buyers looking to keep monthly payments low. It is structured to allow for low payments until the end of the term when one large amount will be due. Since the interest has been “front-loaded” you are typically paying the principle.
These slightly risky car loans can also help if you don’t have the money readily available for the down payment.
Before you start looking for a balloon auto loan it is important to start planning financially. If you don’t have the amount due on the auto loan at the end of the term, the vehicle could be repossessed. Buying back the vehicle will be more expensive than with a traditional auto loan since you still have to pay the principle owed.
Balloon Auto Loan Risks
There are several reasons why balloon auto loans can be financially risky, and often not the best choice for everyone. Some concerns you should address before agreeing to any auto loan terms include,
- Will you be able to save enough for the large payment due at the end of the term, typically in three to five years.
- Are you willing to risk the negative effect a vehicle repossession can have on your credit score if you can’t make the final balloon loan payment?
- Refinancing is not always an option with a balloon payment auto loan since the amount owed will typically be more than the vehicle is worth.
Balloon Auto Loan Benefits
While there are risks associated with balloon auto loans, there are also a few benefits. If you are positive that you will be able to make the large payment due at the end, it could be the best way to get a new vehicle.
- A balloon auto loan can give you the additional time you need to save money for the large end of term payment.
- It allows for the “sale option”. Meaning that the vehicle can be legally sold and the money from the sale used to pay off the loan. This can help prevent the auto loan from “turning upside down”.
- The chances of repossession are often less since the monthly loan payments are lower, though this can change at the end of the term.
- Leaves the borrower with additional cash since a down payment is typically not required with a balloon auto loan.
Balloon Auto Loan Requirements
Most lenders require two things to be approved for a balloon auto loan.
- You must be able to show proof of income to reassure lenders that you will be able to make the low monthly, and large balloon payment at the end of the loan.
- A good FICO score and solid credit history are also typically required if you want to be approved for a balloon auto loan.
However, if you have a poor credit score it is still possible for you to get an auto loan with a balloon payment.
How to Get a Balloon Auto Loan with Bad Credit
Your poor credit score will make it more difficult for you to be approved for any type of financing, including a balloon auto loan.
Some of the same tips that can improve your chances of being approved for a traditional auto loan can also be used when you are applying for one with a balloon payment at the end.
- Even though a down payment often isn’t required with a balloon auto loan, applying one can significantly improve your chances of approval if you have bad credit.
- Having a co-signer can reassure potential lenders that the bad credit auto loan will be repaid on time.
- If a stock is about to mature or you are schedule to receive any other influx of cash, showing proof of the expected amount can improve your chances of approval for a bad credit auto loan with a balloon payment.
Buy Here Pay Here car lots are more apt to approve auto loans for applicants with bad credit than traditional lenders, and this is something that you should consider when you are shopping for the best offer.
Comparing Balloon Auto Loans
It is important to remember that all balloon payment auto loans are not necessarily the same, regardless of your credit score. This is especially true if your FICO score is below subpar. Before you agree to any auto loan terms, you want to “shop around” to ensure that you are getting the best deal financially.
Here are a few of the aspects you’ll want to compare.
- What is the “end” number?
Do not sign any balloon loan agreement without looking at the final number. This is the amount you’ll owe when the last auto loan payment is due. One of the worst financial mistakes you can make is to not know how much is due at the end of the term.
- Know the monthly payment amount.
Your credit score will affect the amount of the monthly payments. If it is subpar or lower, expect to make higher payments each month. By comparing balloon auto loans from traditional lenders and Buy Here Pay Here dealerships, it is possible to find one with affordable monthly payments.
- Look for an auto loan with low interest rates.
Obviously, you want a balloon payment auto loan with low interest rates. This will depend on your credit score and if you are applying a down payment. Having a down payment, even with a balloon auto loan can lower interest rates and the amount owed each month.
Since the interest rates can change over time, it is always a good idea to discuss this with a licensed financial expert.
Is a Balloon Payment Auto Loan Right for You?
Only you know your financial situation, and if you’ll be able to make the large final payment at the end. Not doing so, will have a disastrous effect on your credit score.
If you are positive that you will be able to meet the terms of the agreement a balloon auto loan might be the best option, even if you have bad credit. Just remember to compare terms and rates with different lenders, before you sign any auto loan contract.