Car financing with a closing rate is relatively popular with car buyers. At first glance, the form of car loan , also known as balloon financing or final installment financing, offers many advantages and the low installments make the dream of a new car within reach. However, the model also has a few drawbacks and disadvantages on closer inspection.
How car loan works?
Learn everything you need to know about financing a car with a final installment in this article.
- As a buyer, you pay part of the purchase amount, but some providers also waive this.
- You only pay comparatively low installments during the agreed loan term. These car loan typically run for three to four years.
- At the end of the term there is a large final installment, which results from the residual value of the vehicle calculated at the start of the contract.
As a buyer, you have three options at the end of the term on how to proceed:
- You can pay the remaining debt if the means are available.
- You are trying to get follow-up financing. This is usually a normal car loan with monthly installments.
- You return the vehicle.
The last option in particular can be a major financial burden. Because the residual value is determined on the basis of the expected mileage and the expected loss of value at the beginning of the contract. If the car is worth less at the end of the balloon loan term, you have to pay the difference. Follow-up financing is also not without problems. Because in addition to the usually higher rate, the car will now also incur more maintenance and repair costs due to its age.
At first glance, the low rates appear to be achieved by partially deferring the loan. The residual value of the car is calculated as the final final rate. You will not repay this amount during the term of the car financing. However, the banks still charge you interest on this item. This increases the pure financing costs by up to two thirds compared to classic loans.
When is balloon financing worthwhile?
In two cases, the car loan with a final installment offers an interesting alternative. If you want to keep the car and expect a larger sum of money towards the end of the loan term, this solution makes sense. For example, the capital from a life insurance policy that has matured offers itself for the financing of the contract. Even if you have to invest all of the financial reserves for a down payment, the lower installments can be the sensible way despite the higher costs.