Delving the Issue
Recent survey says that 60 to 65 percent of people with age ranges from 18 to 30 prefer used car more than brand new cars. Awareness to finance fuel this increase as consumers starts buying used cars to get skeptical credit. But being skeptical to credit histories is not enough if one wants to get the ideal worth of his or her dime in purchasing a used car. One needs to be meticulous and well informed about this disturbing trend in used car financing to avoid the trap. The message is simple: Beware of lenders who want to get you into a used car purchase with a balloon loan.
A balloon loan is defined by Investopedia.com as a type of loan which does not fully amortize over its term. To repay the remaining principal balance of the loan, a balloon payment is required at the end of the term. This is not new in the industry. In fact it is more of undergoing resurgence as the economy improves and credit unions want to improve their bottom lines.
Investopedia.com also explains that balloon loans can be attractive to short term borrowers because they typically carry a lower interest rate compared to a loan with a longer term. However, another trend in used car buying as per data from the Experian Automotive, shows how loans get longer with the average used-car buyer taking out a 60-month loan in the first quarter. Used-car loans of 61 to 72 months rose 6 percent in the first quarter from the year-earlier level, while those of 73 to 84 months jumped 23 percent. Loans with terms of 60 months or fewer declined.
Impact to Consumers
Initially, availing of a balloon loan for used car financing allows consumers to purchase more than what they can afford with lower monthly payments and less down payment required at signing. The dilemma comes to the picture when the loan is due and the borrower still does not have the necessary amount to pay in agreed upon terms. This will take the borrower to the point where everything is at the mercy of the lender who might extend a short-term loan to pay the remainder that is due at what is bound not to be the greatest interest rates. Borrowers should be aware of this refinancing risk and/or the risk that the loan will reset at a higher interest rate.
Avoiding Used Car Balloon Loans
Spending your time now can save you later. Prior to shopping for the car, check out loan offers with the following considerations in mind:
No monthly payments. Purchasing a used car based on monthly payments could be a gateway to a balloon loan. Any used car seller may stretch it out for years to come.
Wait for the right time. Sometimes when extreme urges come in the way, resistance is hard to find that any offer seems to be rationale and financially wise. Wait at least six months or until you secure the right amount for the down payment. You might consider putting what you have paid in loan payments in a separate bank account.
Do it upfront. Make your balloon payment up front instead of at the end of your loan.
Source: Mr. Ed Auto Financing