Getting a Balloon Payment Car Loan with Bad Credit

March 18, 2013

A balloon payment car loan is a popular option for those who feel they just need to buy a little time to get the cash in hand necessary to pay for a vehicle. In the balloon payment loan setup, borrowers pay smaller installments in exchange for a big payment at the end of the loan term.

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Loans with balloon payments are easier to get for those with good credit. For others with less than than stellar credit scores, it's a little harder to get good loans of almost any type, including balloon payment loans, since lenders are less eager to take on debt for those without perfect credit. Here are some pointers for arranging a balloon payment car loan when your credit is not so hot.

  • Look into options - getting a co-signer can help with securing an auto loan including balloon payments. Another option is to pay a bigger down payment. If your credit is not great, hoard up some cash and try financing with a big check down on the table, and you'll get better results. It also helps to seek out lenders with a reputation for arranging "sub-prime" auto loans, as they are more likely to work with your credit score.
  • Look at interest rates - getting one of these loans with balloon payments isn't worth it unless the terms are favorable to the buyer. When you look at the terms of the loan that a lender extends to you, the most important thing is to understand how much in total interest you will be paying over the term of the loan. This will keep a borrower from inadvertently overextending themselves and winding up buried in debt.
  • Tailor the loan term to your situation - loans with balloon payments are often sought out with those who have some specific prospects of a maturing investment, a windfall such as an inheritence or prize, or some other "hedge." The more concrete these outlooks are, the better. Then, the borrower can take out a balloon payment car loan with a specific period that corresponds to the influx of capital, so that soon after the money comes in, the loan comes due, and the borrower pays it off all at once. Getting a loan with an excessively long term can mean you'll end up paying too much interest over time.
  • Pay it off - in the end, what matters is that a borrower has the means to pay back the balloon loan at the end of the term. Leaving this kind of auto loan unpaid can have drastic consequences for the buyer, so in any case, make sure there is a backup plan, rather than just skating on the debt until the bill comes due. When this happens in a restaurant, you can wash dishes; when it happens in an auto loan, you'll end up with a repossessed vehicle, a big debt and some really big problems.

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