Why You Should Stay Away from Balloon Payment "Leases"
A balloon loan is basically a conventional auto loan with lower monthly payments and a large "balloon" payment at the very end.
This balloon payment is usually optional - which means you can return the vehicle instead of buying it - similar to a lease.
A big difference is that a balloon loan is usually setup so that your monthly payments are higher than a comparable lease payment and the balloon payment at the end is less than what the car is worth, so in most cases it makes sense to pay off the balloon payment and keep the car.
The balloon payment needs to be paid in cash or via a new car loan. If you take out a 4 year loan to pay off the balloon payment, then you're adding an additional 4 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 just lease a car rather than get a balloon loan.
Some manufacturers have special names for balloon notes. 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.
My Recommendation for Car ShoppersTrueCar No-Haggle and Edmunds Price Promise are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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