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.
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid