Balloon Payment - You Still Pay Interest on The Balloon Portion, Right?

jinroh on 05/11/2015 - 21:03

From: https://au.pfinance.yahoo.com/compare/personal-loans/article…

When buying a car, you have the ability to ask for a balloon payment at the end of your car loan. For example, if you buy a car worth $20,000 – you can finance $15,000 and request a final payment of $5,000 which is called the balloon. This final $5,000 is not part of your finance. You do not pay interest on it. There are normally rules as to how big of a balloon you can have, though you can quickly see the benefits in financing only a part of the car instead of the full amount.

I was quite sure that one would still pay the interest on the balloon portion, because until it is paid, it is money owed. Isn't that right?

Or perhaps there is "dealer promotion" whereby if you pay RRP of the new car, then you will be offered interest free on the balloon (which technically you still pay by not getting the possible discount on the car price).

Or is the article above totally wrong and misleading?

Automotive

Comments

  • ozhunter on 05/11/2015 - 22:03

    I'm not particularly sure how it works but the interest rate is the same regardless of the balloon size. You pay less of the principal amount each month, which equals to paying more interest overall.

    Small Balloon = Less interest but higher repayments.
    Big Balloon = More interest but lower repayments.

    Here's a good calculator http://www.thecalculatorsite.com/finance/calculators/carloan…

  • fillit on 05/11/2015 - 23:34

    Haven't read the article, but balloon payment is generally applied when you intend on disposing the vehicle at the end of finance term.

    This is usually beneficial when the car is less than 7 years old and you can tax full tax advantage, ideally the balloon payment is at or less than what you expect to get for the trade in of the vehicle, then you start again with a new loan.

    There may also be situations where a balloon is required to meet credit requirements from the lender as well, however that's up to individual circumstances.

  • ilostnemo on 06/11/2015 - 00:57

    There is no interest on the balloon part of the loan. As you aren't borrowing that amount.

    • ozhunter on 06/11/2015 - 02:01

      I can't seem to find a straightforward answer to that question on the net.

      This is using the calculator in my previous comment. 20k car, one has a balloon payment of 1k the other of 10k. The car with the 10k balloon payment pays more interest overall as he pays less of the principal amount each month.

      https://drive.google.com/file/d/0B90aBBkpJZ8tSkFfXzJhWk9qSjg…

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