A balloon car loan can mean a lower monthly payment, but consumers with less than perfect credit will find it hard to qualify for one.
Balloon Car Loan
A balloon car loan is much like leasing a vehicle. Typically, borrowers put little or no money down. And while interest rates are about the same as a regular car loan, the monthly payment is lower because, like a lease, it's usually based on some combination of the vehicle's depreciation plus the monthly interest charges.
Like a lease, this leaves a large balance at the end of the contract. But unlike a lease, the borrower simply can't turn in the vehicle to the lender, since the borrower, not the lender, holds the title.
But borrowers at this point still have a number of options:
- They can pay off the remaining balance and own the vehicle outright.
- They can refinance the vehicle and continue to make monthly payments until it's paid off.
- They can sell the vehicle outright or trade it in on another car.
The only problem with a balloon loan is that consumers who might see an advantage in this type of financing had better have good or even great credit, because high-risk lenders don't offer this kind of financing. Here's why:
Why Subprime Lenders Don't Offer Balloon Car Loans
The reason subprime lenders don't offer balloon loans is that, like a lease, the value of the vehicle being financed is usually less than its market value during the entire loan term. This means that if the borrower misses or stops making payments, the lender faces a greater chance of losing money if the car has to be repossessed. This makes this type of vehicle loan riskier than a conventional car loan.
As a result lenders, if they offer balloon car loans, usually only approve them for their most qualified customers - borrowers with very good to excellent credit. For credit-challenged consumers this means that there is very little hope they will qualify for this type of used or new car loan.
The Bottom Line
While a balloon car loan can reduce the monthly payment on a vehicle, lenders that offer these loans, because of the higher risk involved, usually only approve them for their most credit-worthy borrowers.
Fortunately, for a good many credit-challenged borrowers, there is an option. At Auto Credit Express we match people that have experienced credit difficulties with new car dealers that can offer them their best opportunities for approved auto loans.
So if you're ready to reestablish your car credit, you can begin now by filling out our online auto loan application.