Balloon financing?

[Andain]

I'm looking to get a used vehicle, a truck, as it would be handy for me to have for personal and job use. Since I currently commute, the gas mileage would be a killer. Offsetting the price of gas with a low payment would work great. My plan is for low payments for 1 year until I move (possibly sooner) much closer to work. After that, the money saved in gas will go towards making much larger payments and potentially eliminating the balloon payment altogether. Even if there's some payment left, I could easily pay cash to pay it off by then. I figure a 60 month term would be most ideal for me and a finance company.

 

My concern is finding a lender. My credit is in the dumps (610 or so) after a student loan fiasco and a couple credit charge-off's 4 years ago after losing my job. Financially, my future prospects look very good and currently things are stable. I'm pretty sure I can get approved for standard financing. I have some equity in my current leased vehicle, about $1500. The bad thing is that I will be way over my mileage when it comes time to turn it in, so you can see why I would like to get out of it, especially while its value is high. Should I attempt dealer financing or is there someplace I could apply beforehand?

 

I'm estimating an OTD price of around $22-23K, no down payment, and would like payments not to exceed $250 for the first year. Is this doable or even smart?

 

Thank you!

[MarvBear]

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[MarvBear]

$22-23K, no down payment, and would like payments not to exceed $250 for the first year.

 

I don't know how to make that math work.

 

If you were to try and do a 60 month balloon note, (which I would strongly discourage) then you would have 59 Equal payments of $xxx.xx, and the final balloon of $xx,xxx.xx. And it's not uncommon for balloon contracts to have mileage restrictions, very similar to leases, if the consumer does not exercise the balloon option. (if the contract is written that way).

[mk_378]

Bad idea. The bottom line is when you see you can't afford the payments and gas you're buying too much truck. A 60 month balloon loan on anything used is big negative equity and also a significant chance the vehicle won't outlast the payments.

[road2freedom]

No experience with balloon loans myself, but I was under the impression that they are a bit harder to obtain, especially if you have spotty credit, since the lender is assuming most of the risk until the final payment is made.

[Andain]

I was under the impression that balloon financing, while similar to a lease, (1) allows for ownership and is (2) easier to finance being that you pay mainly interest, which is what banks want--low payments are easy to make. I am trying to figure out a financing plan that will not allow me to ever be upside down, given the historical value of the vehicle. It's not a "plain jane" truck; it also helps that it's in mint condition with low miles.

 

I can certainly understand the logic you all have given. It was my initial impression as well. Some sources have countered that logic with solid reasoning. I'm trying to get some sound evidence either way. I tend to make calculated decisions concerning my purchases, but this type of financing is troublesome. The whole point of balloon financing is, imo, to provide financing similar to a lease, but without the restrictions and extra fees a lease entails. In other words, I'll pay the extra sales tax, but I won't have to pay the annual property tax; I'll take ownership, but without mileage restrictions and the term fees and so on and so forth. I've seen many variants, usually when dealing with credit unions. They allow you to return the vehicle at the time the final payment is due. I'm not so sure I want to in this case. Also, there are some possibilities for tax deductions, which would be impossible with a lease.

 

From what I currently understand, there's a fine line between balloon financing and leasing. In this particular case, I would prefer ownership over leasing. Leasing, imo, is just more expensive in the long run with too many strings attached. As previously mentioned, I currently have a lease. I'm fortunate that my residual will be far lower than auction price (if I decide to purchase then trade), but aside from that, I'm not really happy with the terms.

 

The key here is my willingness to step up the payments in the future. I know what I'm buying and I feel that it's worth it, so I'm committed to that. The flip side on the financial end is that final payment that has to be made. I suppose I would be in the same situation as anyone else...the promise to make it.

[road2freedom]

If you look at an amortization table for traditional financing, the lender is getting a majority of their interest in the beginning of the loan as well, however you are also paying down the principle at a faster rate, making their liability decrease faster with each payment. I could be totally wrong in my assumption - hopefully Marv or someone else has some more direct experience to share.

[gamecockcountry]

I was under the impression that balloon financing, while similar to a lease, (1) allows for ownership and is (2) easier to finance being that you pay mainly interest, which is what banks want--low payments are easy to make. I am trying to figure out a financing plan that will not allow me to ever be upside down, given the historical value of the vehicle. It's not a "plain jane" truck; it also helps that it's in mint condition with low miles.

 

I believe about the only way to accomplish that sentence right there is to buy with cash or have a nice down payment and a low interest rate and a short term. With balloon financing you will probably be upside down until you pay off the balloon payment.

 

I did the balloon payment financing for my first vehicle. That was a mistake. Yes, I had low payments and didn't put anything down but after almost 5 years of making payments I still owed a large chunk of money and the car wasn't worth the balloon payment.

Edited April 27, 2012 by gamecockcountry

[MarvBear]

I was under the impression that balloon financing, while similar to a lease, (1) allows for ownership and is (2) easier to finance being that you pay mainly interest, which is what banks want--low payments are easy to make. I am trying to figure out a financing plan that will not allow me to ever be upside down, given the historical value of the vehicle. It's not a "plain jane" truck; it also helps that it's in mint condition with low miles.

 

I believe about the only way to accomplish that sentence right there is to buy with cash or have a nice down payment and a low interest rate and a short term. With balloon financing you will probably be upside down until you pay off the balloon payment.

 

I did the balloon payment financing for my first vehicle. That was a mistake. Yes, I had low payments and didn't put anything down but after almost 5 years of making payments I still owed a large chunk of money and the car wasn't worth the balloon payment.

 

 

+1

 

a future appointment in time to deal with negative equity whether it's a lease or a balloon contract.

[spotlessbureau]

I'm shocked they still offer balloons. One of my friends who works at Honda did one on a Ridgeline. A huge mistake. Find a truck you can afford without doing the balloon. You never mentioned what type of truck you were considering, but I would suggest the Toyota Tacoma since you say you pack on the miles. It has the best resale value of any truck. It comes in 4 or 6 cylinder in all cabs. Good luck.