F & I Guy: Baloon Financing?

[IOU 13]

Is it good or bad ? What are the benefits ? Dealer tricks to avoid ? Best gameplan to get it ? How does it compare to leasing ? I just want general info. I am looking to buy or lease a Mercedes and they offer it. Thanx for your advice.

[ms6073]

Is it good or bad?

 

Only if you dont mind paying for the car twice? Look, be realistic here, a balloon payment is simply a way of deferring part of the cost of the car to a later date - been there, done that, and paid the stupid tax! The reality of the situation is that a Balloon payment is a way for us to rationalize a purchase we really can not afford. Of course we fool ourselves into believing that we can afford the purchase but if that were true, we would not be trying to defer some of the cost - we would take the hit and pay the higher car note (or even pay cash) to start with!

 

Here is the problem, unless you can pay cash for the balloon payment when it comes due, or you plan on selling the car prior to the final payment, you will be faced with financing the baloon payment at some time in the future! Obviously the lenders love this type of financing but how are you going to feel about signing a finance contract for another 2-3 year period in order to cover the balloon for a car that is now 4, 5, maybe even 6 years already!

 

Even if at some point prior to the balloon coming due, you decide that you want out of the deal and try to trade or sell the car, I think you will find that because you deferred part of the cost of the car, the negative equity situation will be much greater than had you accepted conventional financing to begin with. Regardless of what the salesman are telling you, unless you pay cash, you will rarely find yourself in a positive equity position with any automobile for the first 2-3 years unless you make extra payments on the note - automobiles are depreciating assets that begin to lose value beginning the moment you sign the finance paper's.

 

Why not look around for a 1-2 year old pre-owned, that way someone else will have taken the the depreciation/negative equity hit. As long as you do your homework and research the deal, you would be able to purchase the car using conventional financing and are less likely to take a hit on negative equity.

 

 

Michael

[IOU 13]

Thanx Michael. I thought you could give the car back to the dealer at the end of the loan, before paying the baloon, just like a lease; the only difference being I own the car while I drive it, not the dealer. If you are correct, great point and I will not pursue it. If I am correct, then is it worth it ?

[ms6073]

Thanx Michael. I thought you could give the car back to the dealer at the end of the loan, before paying the baloon, just like a lease;

 

In my experience (Audi A-4 Quatro), I had the option of returning the vehicle to the dealer at the end of the initial term. If at that time I elected to purchase another vehicle from the dealer then more than likely I would be clear of the car without additional expense. On the other hand, if I did not want to buy another car from the dealer, the dealer would either try to sell the car or appraise the value and if this amount was less than the amount of the balloon payment, then I would have been responsbile for the difference.

 

Since the appraisal would have been based on wholesale/tradein value, not retail - the dealer is not going to take a car that they cant make a lot of money on - I cant say for sure but there was also the possibility that the car might have been sold at wholesale auction and again I would be responsible for the balance due! Short and simple, the economics of a ballon payment for imports really does not make sense unless you like having a car payment all the time.

 

If you use conventional, 4-year financing, dont drive the wheels off of a car keeping the car in reasonably good shape for 5-6 years, you can then either trade it in or sell it yourself. Yes, that is a pain, but by doing it this way, if you bank the money you would spend on a car payment for years 5-6, you help eliminate negative equity situations because at the next car purchase, you can use the money (profit) from the sale of the car as well as the money you banked in years 5-6 of ownership, as a downpayment on the next car you buy!

 

This not only helps reduce the possibilty of being "upside down" in a pruchase, but may even allow you to finance for a shorter term. Repeating the process only using a 3-year finance term and a 4-5 year resale window, you are now trying to sell a car that is only 4-5 years old and would bring a hier return. If you repeat the process once again, you could concievably eliminate car payments by year 15 but unfortunately most of us are not able to budget our finances that efficiently as life often throws us curve balls or throw a wrench into the works. :8)

 

 

Michael

[the F&I car guy]

ballons are good if:

 

1. you like new cars every 2-3 years

2. you have come to the realization that you will never own a car...thus you will ALWAYS have a car payment

3. most of the time you can get special "Ballon Rates" and residuals and also get the rebates....this means .5% rate and $3000 rebate

 

I like ballons......but if you plan on keeping the car the are a very bad idea