Finding a way to afford a new or used car can result in customers choosing finance options that come with low monthly payments. A balloon payment is one of these methods that help people afford their wheels. These are three handy steps that you can have set in place to avoid having your finances deflated when it comes to paying off your balloon payment.
Do your homework
If you are still considering whether you should take out a car loan that comes with a balloon payment at the end, then it is important that you do your homework. Check to see if having a loan that comes with a balloon payment will be affordable for you, especially when it is time to pay the final large sum.
For example, if you want to finance a car with a $30,000 car loan over a period of 5 years at an interest rate of 14.5% you would be paying $706 in monthly payments and $12, 351 in interest over the loan term. With a 10% balloon payment added to the car, it can help reduce the amount you owe to $27,000 over the loan term, leaving you with $3,000 to pay off at the end of the contract term.
Compare whether having a long or short term for your loan will be financially beneficially for you or will it cost you more. A longer finance period will bring down your monthly payments, but it can also see you spending more on interest over the term of the loan. It could also lead you to refinance your loan which can come with additional charges.
Both the comparison and interest rate will affect the way you pay off your loan. Therefore, it is vital that you compare your options. Making use of a car loan calculator can help you know if the loan is affordable or not.
Try to pay more than the minimum
The last thing that you want to do is drag a car loan for longer than you need to when you have other financial commitments that you have to pay off. Even if you do opt to choose a longer loan term because it offers more flexibility with its low monthly payments, try to pay more than the minimum amount of your loan.
A short-term loan can see you paying off the loan quicker, but it does come with a high interest rate that you need to consider.
One other way that you can manage your balloon payment is to have a deposit saved up so that you can pay more up front. This means that you before you go and purchase a car you need to save up a sizeable deposit. Having your account automated will also ensure that you will never forget to save.
Ask yourself those these tough questions
Having a loan that comes with a balloon payment might initially seem like a great idea to manage your car loan expenses. However, without considering whether you can afford the lump payment that will be due at the end you could find yourself in financial trouble. Asking yourself these few questions can help you know if you are ready to take care of a balloon payment.
- Will the cars’ value hold or will it dramatically depreciate by the time you pay off the balloon payment?
- Will you be able to save up money to pay off the balloon payment when it is due? Failing to do so can affect your credit score.
- How would you feel if you owe more than what your car is worth?
- What will you do if you are unable to refinance your car loan?