Next to your home, a car is one of the largest purchases that you might make, and an auto loan through NuStart Finance is a convenient way to get into the driver’s seat sooner. One of the many auto loan repayment structures available from flexible lenders is a balloon payment car loan, which makes purchases more accessible by reducing monthly payments and moving a large portion of the loan to one final payment at the end. Balloon payment car loans have a number of advantages, although there are a number of important aspects that should be considered before committing.

Advantages

Balloon payment loans are attractive because they allow car owners to keep their monthly payments minimal while ideally saving to pay off the bulk of it at the end of the loan term. This type of auto loan is an excellent resource for car owners with temporarily limited cash flow, such as students and those starting a new job. They are also a good option for those in immediate need of a new car, but who may lack the funds for a large down payment.

Effects

While a balloon payment car loan allows car owners to pay for their vehicles over time with reduced payments, the larger amounts typical of car loans means that the principal of a loan is likely to be pushed back into the final payment. Most of the early payments are applied to the interest that accrues on the loan during the repayment term. As a result, a car can cost more to finance over the life of the loan than with other repayment plan types.

When purchasing a car with a loan centred around the final payment, it is essential to make the final payment in order to protect your years of investment. If the final payment on the payment plan is missed, the car may even be seized. Most of the potentially negative effects of a balloon payment loan come into play due to poor planning, but these scenarios can be easily avoided.

Those who take out balloon payment car loans should set aside some funds each month, in an effort to satisfy their loan in a timely fashion, as refinancing a loan due to inability to pay is a less than preferable option for both borrower and lender. Most of the potentially negative effects of a balloon payment loan come into play due to poor planning, but these scenarios can be easily avoided.

Even in the best of circumstances, refinancing could mean making payments over a much longer period of time, ultimately paying thousands more to finance your new vehicle over the life of the loan. Defaulting on a balloon payment plan by not making the final payment may do irreparable damage to your credit score, making it difficult to obtain finance in the future.

Minimal payment plans are great for those in need of reliable transportation while working to improve their financial position. However, the low payments come with the tradeoff of a much larger final payment and so they are a tool that must be used responsibly. Before committing to a balloon payment-based loan for your car purchase, be sure to realistically consider the value of the car, the expected depreciation during the life of the loan, and your financial prospects in the near future.