The ups and downs of balloon repayments

If you’ve been floating the idea of buying a car, taking out a car loan with a balloon repayment could help you drive away sooner.

Here are some important details to know before signing on the bottom line.

What is a balloon repayment?

A balloon repayment is a lump sum amount paid at the end of your car loan term. This amount is subtracted from the principal, reducing the regular repayments over the life of the loan.

What are the upsides?

The major benefit of a balloon repayment is that it can reduce the amount of your weekly, fortnightly or monthly loan repayments. This can free up cash flow and help you better manage your budget.

What are the drawbacks?

One obvious downside is in the name – the ‘balloon’ or lump sum payment due at the end of your loan term. While it reduces your regular repayment costs, you still pay interest on the lump sum. So, you could end up paying more in total over the life of your loan.

What happens at the end of my loan term?

If you agree to a balloon repayment, you’ll have a big decision to make when it’s time to pay at the end of your loan term. You can choose to:

• Pay your balloon repayment in full and keep the car.

• Sell your car, which could help cover the costs of the balloon repayment and give you the opportunity to buy a new car.

• Trade in your current car for a new one, applying the trade-in value towards the balloon repayment, with any shortfall added to the new loan.

• Refinance the balloon repayment, so you can keep the car and give yourself more time to pay off the remaining cost.

Need help with deciding your next step, or if a balloon repayment is right for your situation? Speak with your local Liberty Adviser today.