A balloon – one word that many of us bring to our minds a multitude of happy memories. It is constantly associated with carefree, childhood, but also a series of exciting moments. However – what links the balloon to the rat? Well, taking out a loan – usually we hear about fixed and decreasing installments. Few people know that among them there is still an installment… a balloon – which is actually profitable in some cases. What exactly is going on in it? softrego.com fleshes this out
Do not get caught in a balloon!
Do you dream of an old-school car, which you could set off on a long distance to family routes? Or maybe you have looked for a classic model simply created to overcome the everyday road to work? Regardless of wake-up, the best way to realize your dream of having four wheels is to sell your old vehicle to buy a second one. However, car owners are well aware that choosing a new purchase is not easy. Visits to the salons, test drives, decisions regarding the color and equipment of the car require a lot of time and energy. And finally, one question remains: how to finance the purchase of a new vehicle when the entire amount is missing for this purpose?
First of all – you can sacrifice funds obtained from the sale of the old one and, secondly, take advantage of the saved savings. However, one swallow does not do springing, and even such steps are not always enough… Then you have the choice of a traditional loan from the bank, a loan of 50 to 50, but also a loan straight from the car dealer. You can also use the loan option with a balloon installment. And with this last solution, we will get to know each other today.
Balloon install – what is it?
The balloon installments are closely related to car loans. Under their concept is an unusual form of loan repayment, which consists in the fact that the customer in the initial period of lending repays only interest, taking into account a single one, about 10 percent. initial payment. However, this point also differs between banks and depends primarily on the creditor’s requirements. In the further part – the remaining period of the loan agreement is mainly the repayment of the last part of the interest along with the capital.
At the end of the crediting period, there is one more important thing. Namely – the borrower must pay, the so-called installment with a redemption, i.e. a balloon installment, whose height can be equal to more than half of the car’s value. It can also be slightly less, e.g. 40%. Everything depends on the policy of the lender and the value of the car.
How is the amount of installments calculated here? It is based mainly on the designation of the formula:
R – installment payment
K – loan amount
p – the interest rate on the loan
d – number of days for which the last installment payment (interest payment) applies 1
Therefore, the last installment is calculated on the basis of the following formula:
Rb – installment payment
K – loan amount
p – the interest rate on the loan
db – number of days for which the last installment payment (interest payment) applies 2
Simply put – a balloon installment is the last installment in a balloon loan and its height is the highest. It is 20-40 percent. vehicle values. However, on the other hand, it allows maximum relief of the household budget – because practically throughout the repayment period, the borrower pays low monthly premiums!
A loan with a balloon inflow – what is the client for?
The balloon loan is usually granted for a period of 2-5 years. It is characterized by a small own contribution, with the lowest possible monthly installments and a high last installment – bearing the name, so-called. balloon installment. In the habit it is 10-20 percent. with a 5-year loan period and 40% at 3 years and about 50 percent with commitment for 2 years. Therefore, when the repayment time comes, the customer has 3 options:
- He can give the dealer the car he used so far and make another loan agreement for a new vehicle,
- Spread out the sum of the “balloon installment” into smaller parts and leave the vehicle with you,
- Pay the entire amount of the “balloon installment” and eventually finish the loan.
Making the right decision depends primarily on the intentions of the new owner. If the most important thing for him is to own a car – it is definitely better to buy it for cash or to take a classic cash loan. However – if the borrower wants to use the vehicle only, it is worth using a balloon loan!
Which banks offer a balloon loan?
These types of loans are mainly offered by the banks of automotive concerns that know the characteristics of their vehicles and their potential value after a given period of use. That is why automotive banks pay a lot of attention to the customer changing his car – he again chose their offer, for example by proposing an even more favorable loan period or by providing additional accessories or car packages. Balloons in their ranks have, among others:
- Toyota Bank Polska
- Skoda Auto
- Santander Consumer Bank
- BMW Poland
- Dacia Poland
- Renault Poland
Balloon install – what are the advantages and disadvantages?
Like every financial product – the loan with a balloon installment has its advantages and disadvantages. Its essence, as we know, is the small borrower’s own contribution and possibly low monthly installments, with the last high balloon part. What brings some risk:
- Although a balloon loan means low installments – remember to pay the last installment,
- Higher interest rates compared to mortgages or cash loans – a balloon loan is quite risky for banks. At the beginning, small installments are repaid, and the capital itself is regulated at the very end. Therefore, financial entities compensate for this with a higher margin or other security,
- Balloon loans are products closely related to a specific brand of a car company – which means that the customer on the one hand may have limited choice as to the type of car. And for such conditions, not everyone has to agree.
However, the undoubted advantages of a balloon loan include:
- It is regulated in standard installments – with the difference that the last payment is the highest. With such a repayment structure, the client pays low installments throughout the loan agreement period, at the expense of one high balloon part. This solution allows you to increase your creditworthiness, because the balloon installment is not included in the loan amount!
- The customer is free to use the vehicle for the whole loan period without repayment. In practice, this means that before the date of the payment of the balloon installment, the owner may decide to resale the car and settle it as part of the last installment. The price of the car is regulated so that its resale is enough for the dealer to pay off the “balloon installment”. As a result, it is possible to sign a new loan agreement with a buyout and a new car at your disposal for several subsequent years, taking into account the previous monthly installment,
- In Western Europe more than 70 percent drivers decide on this way of using the car, thanks to which they can use a well-equipped vehicle for a relatively affordable monthly install,
- Comfort – not only psychological! The situation in which the borrower will want to resign from cooperation with the dealer is to save time and the lack of unnecessary stress associated with the search for a potential buyer. Therefore, if you are fully satisfied with the role of the user, not the owner, then the balloon loan is a hit! In addition, the vision of regular car replacement for new and even more modern is also extremely tempting.
What conditions must be met?
The balloon loan option can be used by anyone – both a natural person and an entrepreneur. Of course, as with every loan, here too – it is necessary to have creditworthiness and to present documents confirming the identity, as well as the amount of income from the last 3 months.
Balloon installments… or what?
This type of lending is identical to the form of leasing or long-term rental. The lender in the form of installments repays a short-term loan – usually for a period of 3-4 years. With the exception that when the last part of the installment is not within its financial scope, it can easily sell a car loan in the salon. Usually, the market price of a 3-year acquisition calmly covers not only the so-called installment with buyout, but also own contribution to the new vehicle. Thanks to that – the borrower can boast a completely new car without engaging additional cash! Of course – he has the right to stay with the current car, paying the entire value of the buyout or spreading it into smaller parts.
Thus – a loan with a balloon install should let go of those who have a strongly developed need to “be” the owner. On the other hand, those who just need to use the car themselves, like changes and do not pay too much attention to acquired things, will certainly be satisfied with this way of lending.