When you buy a car on finance, the cost of your repayments can be quite high. If you struggle to make your monthly payment on time each month, it may be worth considering car finance with a balloon payment feature.
If you're considering getting a balloon-payment loan, you should understand how it will affect your finances. Here, we'll provide thorough information about PCP finance loans.
A balloon payment is a final lump-sum payment on a loan, the amount of which is much larger than the regular monthly payment at the end of the PCP finance agreement, if you want to own the car after it. Balloon payments are either made at certain intervals or, more frequently, at the end of the loan term. Balloon payments are most common in mortgages but can sometimes be used in car and consumer loans.
In general, there can be several kinds of balloon payments:
When taking out a Personal Contract Purchase, the calculationsyou do are slightly different to standard loans.
Your guaranteed minimum future value (GMFV) is the estimated amount that your lender calculates on signing, based on what they think it will be worth when you finish paying them back for this loan.
Suppose you decide to take out a £40,000 car loan. You can choose to pay a balloon payment of £10,000 (25%) on your loan if you buy an expensive car. Your monthly repayments will be much lower than with a standard loan, but you will still need to pay back £10,000 at the end of the loan period.
You can think of the PCP agreement as an absolute amount of money or a percentage of the loan amount. It is an optional final payment, and your provider will be able to tell you if you can participate in this type of plan, depending on your credit history.
No matter how much prices change between now and then - your Balloon Payment won't go up!
A balloon loan usually carries a lower interest rate than a traditional loan. However, it is good to shop around for the best possible deal.
Balloon payment loans are often seen as a more affordable option because they spread the cost differently. This option is not for everyone. It only works if your income is guaranteed to rise significantly in future years.
This is the question that many people have after a period of forbearance. No, you don't have to pay the balloon payment! You can choose from three options when it's time for the final instalment on a PCP car finance:
A PCP finance loan can be a daunting prospect, especially if you don't do your homework. This large, one-time payment can throw your budget off balance and create a lot of stress if you're not ready for it. Luckily, there are several ways to handle a balloon payment.
The balloon payment is a set amount of money you will owe to the lender at the end of your car loan. This payment will never increase or decrease, no matter what happens to the car's value.
The dealer might get their prediction wrong, and the value of your car will differ from what they originally thought. It's never a cause for concern, as long you have kept it in good condition according to terms set out on contract signing!
If you choose not to buy the car, you will have what is called positive equity. This is money that you can use as a down payment on a new car that you finance through a PCP deal. However, you cannot take the money in cash.
With a PCP agreement, you will pay interest on both the loan amount and any final payment. Since your interest payments will be higher, as a result, you should always work out your total costs over the life of your contract in order to determine what's best.
When your car is worth more than the balloon payments, there are several options available. You can either trade it in or sell it. The lender will consider the depreciation when setting the final payment. If you can sell your vehicle for the full amount, you can pay off your loan without being out of pocket. You can also use the equity in your car as a deposit for a newer model.
The Personal Contract Purchase is a great option if you need the money for a large purchase and are concerned about high-interest rates and monthly payments. It allows you to pay off your loan with a large lump sum at the end of the term. However, it is important to note that you will have to make a large down payment at the end of the term, which can put you in a financial bind.
In exchange for large balloon payments, the borrower receives several benefits. Monthly payments on such a loan usually only involve interest, so the borrower will spend much less in the early stages than with standard repayment schemes, which involve gradual repayment of the loan principal.
More importantly, this type of loan is often characterised by a lower fixed interest rate, which ultimately results in a lower overpayment. Balloon Loans can often be very advantageous to some borrowers.
There are more disadvantages to balloon payment loans:
If you want to refinance the final balloon payment, you can do so.
In cases where the GMFV may be too high to afford the final balloon payment, refinancing may be the best option. This can be done via a PCP or Hire Purchase (HP).
When you take out a new PCP, you'll have to make a new deposit, make more monthly payments, and make a balloon payment at the end.
HP deals require monthly payments for the entirety of the remaining value of the vehicle, without a final balloon payment.
There are other options available that don't require you to make a large payment at the end of your contract.
Another popular type of car finance is hire purchase (HP). With this option, you will pay a deposit and then make a monthly payment until the car is paid off. You can usually choose to have the car for either a set period or until you reach the end of your loan agreement. At this point, you will own the car outright.
A car PCP loan may be convenient only for those who are guaranteed to be able to pay a significant amount at the end of the billing period. For those who have no savings and rely on their basic and regular income, such a programme is suitable only if their earnings significantly exceed the amount of monthly payment.
The lower monthly payments and the ease of getting a car loan really stand out as benefits to opting for car finance with balloon payments. But be aware that you're ultimately taking on more risk by doing so.
When you are planning to pay off your car with a balloon payment, it is important that you have some sort of strategy for managing the final bill. You can put money away in a savings account or end up using cards that offer zero per cent interest.
Balloon payments are ideal for people with good investment sense and the ability to manage their spending rationally. Such a loan is also beneficial for individuals expecting significant one-time proceeds at some point in the future, such as receiving an inheritance or paying dividends.
Yes, it's possible. When you agree to a PCP deal, it's broken down into three parts - the deposit, the monthly payments, and then the final balloon at the end. This reduces the monthly payments of the PCP programme, thereby making the car more affordable.
The best way to reduce or pay off your balloon loan early is to make larger payments consistently. You'll pay off the loan early, but you'll still need an extra amount based on how much interest you had at the beginning, so you should increase the payment every month.