A hammer can be a great tool but also an awful weapon! Like leases and balloons.
Lets talk about Lease and Balloon financing. Many “payment sensitive” people sign up for these products. Seniors, please pay particular attention.
I am going to take some time explaining how to tell if one of these products fit you.
Don’t be lured into a dealership that has an ad with a “lowball” price, only to find out the payment is a balloon or lease. Don’t sign a contract that does not allow you to drive as many miles as you are accustomed to. Understand what you are being advised to do.
Now let’s talk about lease and balloon, one may fit you. Do not be afraid.
Lease upside: A lease lets you get into a new vehicle, on a short term, generally at a lower payment than a traditional buy. You are always in a newer vehicle.
Lease downside: Leases are written in a way that you owe all of the payments, no matter what and can only drive so many miles. This term is particularly troublesome for older buyers. For example, if someone leases a vehicle for 36 months at $300 a month, the lease company wants $300 a month no matter what. If the buyer does not want to drive anymore, becomes incapable of driving, or (God forbid) dies, the payments are still due from the estate. Once you sign a lease you commit to a term and payment, you cannot have the lease assigned to someone else or trade the car in. You are stuck with it. Lease a car for $300 per month for 36 months and the bank wants $10,800, no matter what. Then there are the aforementioned potential mileage fees if you do go to term.
Balloon upside: There are balloon products (one bank calls it a “Driving Sense Loan”) that have the features that people like in a lease, like lowering the payment, but since you own the car, you can trade it in at any time. The payments are as low as the lease payments. You owe the same amount of money that you would have in traditional purchase financing, it simply is set up that there is money due at the end of the loan. This lowers your payment significantly. At the end of the loan it is assumed that you would have enough equity in the car to pay off the last payment, or with the "Driving Sense" loan, you can turn the car back into the bank just like a lease and owe nothing.
Let’s use the lease example above to compare. If you leased a vehicle for 36 months and wanted to get out of it in a year, you would still owe $7,200. ($300 x 24) With the balloon you could trade the car in, sell it to Carmax or a private individual. Your exposure could be way less than $7,200.
Balloon downside: If you intend on keeping the vehicle forever there is a payment to plan for at the end of the loan. Most people who take these loans generally plan on trading the vehicle in well before the loan retires.
These are just two different ways of acquiring a new vehicle rather than having the term of a 60 or 72 month traditional loan with a higher payment.
If you are an older person or advising an older person, please, if there is any chance at all that the car will not be needed for the entire term of the lease, look ahead and take this into consideration. Go with traditional financing, or, if you need to lower the payment, think of one of these “Driving Sense” loans, you can get into a brand new car with the monthly payment of an older used car.
You are always free to call me at 585-226-6000, ext 14. I can guide you through your options.