When leasing a car, some dealers will try to put you into a balloon loan, which seems like a lease, but it isn’t.

What is a Balloon Lease Payment?

A balloon lease payment is a conventional auto loan with lower monthly payments along with a heavy amount to be paid as a balloon payment at the end of the loan term. The balloon payment is an option, implying that you can return the car at the end of the loan term, instead of buying it – similar to a lease. The balloon payment is calculated based on the value of the vehicle at the end of the agreement and is often referred to as the Guaranteed Future Value (GFV).

Balloon lease payment is different in a way that it is set up so that your monthly payments are higher as compared to the usual lease payments. However, the balloon payment that you have to pay at the end is less than what the car is worth. In most cases, it seems favorable to pay the balloon payment and get the car at the end.

Balloons aren’t Car Leases

A balloon auto loan is also referred to as a residual payment loan.  The car buyers have to pay interest on the vehicle over the loan term and the principal in a lump sum amount at the end of the term. However, in a usual auto loan, you pay principal and interest throughout the loan term. Therefore, some dealers can try to put you into a balloon loan, which may appear as a car lease.

With a balloon, you own the vehicle at the end of the term and don’t give it back to the dealer. On the contrary, with a lease, you don’t have equity in the car. So you don’t have to worry about anything as you can give it back to the dealer at the end of the lease term.

The major drawback of the balloon lease payment is it is a loan, meaning that you are buying the car. Unlike a leased car, you can’t give it back to the dealer if you are unable to make the final payment. So, be careful.

Why You Should Stay Away from Balloon Payment

Though a lower monthly car payment seems interesting, before making the final decision, ask yourself these questions:

  • Would I be in a good financial state when the lump payment is due?
  • What will be the car’s value after three or five years? Will it depreciate or not?
  • How do I feel about getting more than my car is worth at the end of the loan term?
  • What if I am unable to refinance the balloon loan into a new car loan?
  • If I am unable to make the balloon payment, how it will affect my credit score?

When the final balloon payment is due, you will have three options to get out of a balloon car loan:

  1. Pay the lump sum amount
  2. Refinance the final payment
  3. Roll the payment into a new auto loan

This type of car financing can be beneficial for borrowers in certain situations, like people who plan to sell or refinance before the loan comes due. For others, it can potentially create an issue, as they may not be able to cover the balloon payment.

But the major con of a balloon car loan is the rapid depreciation many cars face as they age. So you can end up owing more than a car is worth. Even if you think of selling the car to pay the balloon payment, you may not get enough money to cover it. Therefore, it is better to plan a balloon payment. Further, refinancing a balloon loan can be challenging as you might end up stretching your original three or five-year plan to seven years or even longer.

Some car manufacturers have special names for balloon loans. GM’s is called Smart Buy, Ford’s Red Carpet Option, and Chrysler’s Gold Key Plus. Don’t fall for these impressive-sounding plans, they’re all just balloon loans, and you should stay away from them.

Lease vs. Balloon Finance

The question of leasing vs. balloon financing your car depends on your needs. The balloon payment needs to be paid in cash or via a new car loan. If you take out a four-year loan to pay off the balloon payment, then you’re adding four years of interest payments on top of what you already paid. It’s not uncommon to be making payments for up to 8 years on a balloon loan. In almost all cases, it makes more sense to lease a car rather than get a balloon loan.

Recommendations for Car Shoppers

If you want to lease a car at the lowest price in your area, you must visit QuitALease.com. It is the quickest way to search for the car you need. Our efficient team is constantly working to ensure that only the right buyers are matched with the lease sellers. You can lease a car, transfer your lease, take over someone’s lease, or even quit an ongoing car lease. You will find amazing car deals with car details and pictures, and this must be your first step when you make a final decision to lease your next vehicle.

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