Requirements For A Balloon Payment Car Loan

A balloon payment car loan may be an option for you if you are looking for a car loan. However, you should understand how a balloon payment car loan works and why they are useful before you consider using one.

There are requirements you must meet in order to qualify for a balloon payment loan.

What Is a Balloon Payment Loan?
A balloon payment car loan is structured to keep initial monthly payments very low. The loan is designed so that making regular monthly payments will not result in the loan being paid off at the end of the term. Instead, there is a large single payment, or balloon, due at the end of the term.

Up until the balloon payment, most of the other payments go towards interest on the loan, so with a balloon payment car loan, you have very little equity in the car until you make the balloon payment.

Most people expect to finance the remaining amount when the balloon payment is due with a refinance loan. Generally speaking, those who borrow with a balloon payment car loan are in a tight financial situation and expect their situation will improve by the time the balloon payment is due. They anticipate being able to qualify for a loan with better terms at that time.

Others plan to sell the car before the end of the term and pay off the balance with the money they get from selling the vehicle.

Requirements for a Balloon Loan
In order to qualify for a balloon loan, you need to have a regular income – in other words, have proof that you are employed and can make payments on the car. You need to have a solid credit rating, although the exact number is flexible with some lenders.

The primary requirement before getting a balloon payment car loan is to fully understand the terms and conditions of the loan, and to understand the benefits and hazards of taking on a balloon payment loan.

Hazards of a Balloon Loan
There are many concerns you should have about taking out a balloon payment car loan.

The first concern should be obvious, but many dismiss or overlook it. It is highly likely that you will not be in a better financial position in 3 to 5 years, as much as you hope or would like to think that you will be.

You need to carefully consider what you will do if you are unable to refinance your car at a better rate and with better terms. How will you pay that loan off? You will still be obligated for the balloon payment. Are you prepared to let the car go? What will you do for transportation? Not making that balloon payment will damage your credit score.

A second concern is that since you are paying only interest on the loan through the end of the loan period, you will likely owe more on the vehicle that it is worth. This will cause you great difficulty in selling for the amount you owe or refinancing the loan.

Before taking on a balloon loan for a car purchase, carefully consider the value of the car, the expected value in two or three years when the balloon car payment will be due, and how much you are willing to sacrifice to own the vehicle. In many cases, a balloon loan is not the right financing option, and simply allows you to incur more debt that you can really afford.