There are balloons and then there are balloons. Of course there are the balloons you played with when you were a kid, hot air balloons that you see flying overhead with happy passengers reveling in the view and then there are finance contracts that are called "balloons". I am here to tell you about the advantages and pitfalls of "balloon" payments that a dealer may present to you.
Simply stated, a balloon contract is one where there is still an amount of money due at the end of the finance term. Normally you would take a loan and at the end you have paid off the vehicle and own the vehicle. Lets say you finance for 60 months, at the end of 60 months the bank sends you a "lien release" and you have no payments.
If you take "balloon" financing there will be an amount of money you owe delayed until the end of the loan so at the end of the loan YOU STILL OWE MONEY. The amount can vary, depending on your contract. It could be as much as 30% of the amount you are financing. Look at it this way, if you financed $25,000 you could have a "last payment" of $7,500 and who has that kind of money laying around? Yes, your payment was much lower for 59 months but WOW now you have a problem if you can't afford the balloon payment.
Is a balloon necessarily a bad thing? I look at it this way, a hammer is a wonderful tool but also a pretty powerful weapon! It all depends on how it is used. Let me explain.
If you want to buy a Chrysler Dodge Jeep or Ram truck right now, Chrysler has a special incentive where you can get up to an additional $2,500 in rebates if you take balloon financing from one of their approved banks. This is kind of a "no brainer". If you defer $2,500 to the end of your contract Chrysler will give you $2,500. Why not? You are paying less for the car to defer the same amount of money.
The same balloon financing can be used, however, on vehicles where there is no additional incentive. If you do not fully understand what is going on a dealer can use balloon financing to make his payments look much lower than the next dealer. You need to have your eyes open when a dealer is quoting payments to you. You need to be fully aware of the amount of money that you will owe, if any, at the end of your contract and if there are any early termination fees involved.
After all, you could have a "time bomb" ticking in your finance agreement. At the end of your term you could be in a position where you will have to "cough up" a lot of money, refinance your vehicle or trade it in just to handle the balloon!