How balloon payments reduce the monthly cost of your car classic finance
If you are considering financing your car and want to structure your monthly repayments in a way that reduces the per calendar month cost, you may wish to consider a balloon payment at the end of the agreement.
This type of agreement, sometimes called ‘Lease Purchase’ or “Hire Purchase with a balloon” allows you to defer part of the capital sum borrowed until the end of the loan term.
How Do Balloon Payments Work?
The Lender or Finance Company will undertake a valuation of the car you wish to purchase (to make sure you are paying a fair price) and will then provide you or your finance broker with the cars estimated future value. The future value will typically be at either 2, 3, 4 or 5 years depending on your intended period of ownership. In calculating the future value of the car, they will take into account things like the vehicles current mileage (if used), together with your estimated mileage over the term.
For example if you purchase a car with 19,000 miles on the clock and plan to do no more than 5,000 miles a year, the balloon valuation will be based on the total mileage at the end of the term. If the finance agreement is over 2 years , the balloon will be based on total mileage of 29,000 miles (current 19k + 5k pa). If the agreement is over 3 years, the total mileage will be 34,000 miles (current 19k + 5k pa).
Typically, luxury marques such as Aston Martin, Ferrari or Porsche will hold their future value better than a non-luxury or fleet car. This means they will have a higher residual value, resulting in attractive structured monthly repayments.
Here are a couple of examples:
However, your monthly repayments will also be affected by the purchase price of the car and amount of the deposit you put down, in addition to any balloon payment. The balloon payment can never be more than the amount you are borrowing and in most cases will be significantly less.
You should always remember that the balloon payment is your risk at the end of the loan term, unlike Personal Contract Purchase (PCP), where the finance company not only underwrite the final payment, but they guarantee it to. Typically most lenders will set the final balloon payment at a percentage of its anticipated future trade value. But remember, you buy a car at a retail price and in most cases when you part exchange it for another car you are given a trade in or trace price.
Here at Fast Car Finance, we always want to provide honest advice and treat our customers fairly and that is why we will sometimes give guidance against taking the offer of an unrealistically high balloon payment. The balloon payment is based on the future value of the car and whilst a very large balloon could make your monthly repayments lower, you could end up in negative equity, where you have paid more out for the car than it is worth. If you do more than your anticipated mileage or the value of the car drops, you could owe more on your finance agreement than your car is worth.
So what happens when you get to the end of your agreement and the balloon payment is due? The first option is to pay the balloon payment so that the car is then yours. But if you don’t have the funds available, you may wish to look at refinancing the balloon payment. By doing so, you will take out a new finance agreement to repay the balloon amount in equal monthly instalments over a fixed period.
Here is a recent example:
Looking to Refinance a Balloon Payment?
If you’re looking to refinance a Balloon payment, then an independent finance broker can help you to secure the rates. We have access to a wide panel of lenders, so please contact our team on 01635 785 400 or email info@fcfinance.co.uk to book an initial call with us.
