Balloon Payment – Beware of the Benefits
The request for a balloon-type facility or an offset payment (sometimes called lease purchase) has become second nature when discussing the repayment profile of a car refinance or purchase but do you really know what it is? Not to be confused as it often is, with a PCP product, the balloon payment is often misunderstood and can lead to serious implications at the end of an agreement if not handled responsibly when you choose an offer.
So, who really benefits from this type of finance package? The fact is the lender does, although it does reflect a lower monthly payment. Why? Because you are paying back less of the loan and deferring a lump sum until the end of the agreement, obvious right? But here’s the rub – few understand (or have it explained to them) that you are still paying interest on the whole amount, even if you are not reducing the capital element, so the overall cost of funding the car is much greater. It is indeed a clever way of getting you to pay more for your money, along with the risk of the car depreciating below the value of the balloon. A risky and potentially expensive game in a softening market. Don’t be fooled by capital companies making large balloon offers as the benefits are solely theirs, and the risk wholly yours.
Balloon type facilities can work if you have a good deposit, keep the term minimal, are realistic about the balloon amount and how it will be paid. As always, we recommend a Regulated Agreement where possible for added protection when you receive advice.
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How Do I Pay off my Balloon Payment When it is Due?
Your balloon payment is usually taken as the final payment by Direct Debit and most lenders will pre warn you of this. The alternative is that this amount can be refinanced with a new agreement over an extended period. We often refinance balloon payments on our own agreements or those provided by other lenders. Either way, this can be arranged for you through our office, if required.
A balloon facility is a useful way of funding provided the profile is arranged responsibly. Avoid kicking the can down the road, hoping your car will have the appropriate residual value. Listen to the advice we give, think about how you want your loan structured and ultimately, your plan to repay the balloon. If something looks cheap, look deeper and ask why. If you have an agreement sourced elsewhere, now may be the time to review and restructure your current finance package, and we will gladly look at it with you.
We are here to help – Contact us for further information if required.