The automotive industry is one of the sectors that continues to evolve. In this sense, thanks to innovative technologies, the major car manufacturers regularly launch new models that are more and more efficient and with an authentic design.
To finance the purchase of the car of your choice, you can use conventional car loans. Procurement procedures for this type of loan are today without difficulty. However, if you do not want to commit to the long term, a solution is needed: the balloon credit.
The balloon credit: what is it?
Since buying a car requires a large budget, more and more households opt for auto credit, a specific financing solution by which the bank, or another credit institution, offers a certain amount of money to cover the all or part of the price of a vehicle.
In the category of auto financing solutions, the balloon credit is an advantageous option for people who adhere to the trend in terms of cars. Indeed, for some individuals, the car is more than just a means of transport. It is a machine that can define the social status and tastes of the owner. Having a car gives you more freedom and improves your living conditions.
Balloon credit is a loan similar to long-term lease (LLD) or a lease option (LOA). Unlike the classic auto loan, it does not engage you in the long run. Being a “thin loan”, the balloon credit is characterized by the fact that its repayment is required in full when the deadline arrives.
This type of loan is not amortized over time. Its duration varies between 12 and 48 months, but can last up to 60 months. As with any type of loan, monthly payments are lower if the repayment period is longer.
Thanks to a buy-back agreement on the car purchased, you can, depending on the terms of the contract, separate you from the vehicle and choose a new model. The dealer is responsible for buying the car at the end of the contract, for a predetermined price. In this context, the amount requested at the time of the repurchase of the automobile by the dealer is called “balloon”. Hence the name “balloon credit”.
Some principles of balloon credit
Balloon credit is granted under certain conditions. It requires a personal contribution of 15% of the price of the vehicle. This contribution can not be refunded to the buyer. This type of loan is offered with low monthly payments. You only have to pay interest on the credit. For the capital that remains to be paid, the sum is required at the end of the contract.
The vehicle buyback agreement is established in advance with the dealer. It tells you about the value of the car at the end of the contract. A balloon credit agreement consists of several clauses, and specifies various information, such as: a mileage package, maintenance arrangements, the amount of monthly payments (interest rate), the value of the vehicle at maturity, etc.
The mileage plan is the maximum mileage and the price of the excess kilometers. A balloon credit obliges the user to respect some maintenance modalities.
When your balloon credit agreement comes to an end, you have the choice between several alternatives:
- sell yourself the car and pay off the auto finance loan,
- buy the vehicle by paying the purchase option,
- renew for 1 or 2 years your lease,
- return the car to the dealer. The latter has the obligation to repurchase it, according to the terms of the repurchase agreement signed with the initial credit agreement. It is the dealer who will pay the purchase option.
The benefits of balloon credit
Do you tend to change vehicles frequently enough? Balloon credit is recommended. Indeed, at the end of the contract, you can decide not to keep the vehicle. You can then contract a new balloon credit and buy a newer car model.
This type of loan is also appreciated for its low monthly payments and because it does not commit you in the long term. In addition, you have no worries about the resale of the vehicle.
Even if the interest rate of a credit balloon is higher than that of a conventional car loan, the conditions of repayment remain advantageous. You have the option to repay all or part of your debts, at any time. A partial refund will result in a decrease in monthly payments.
At the same time, the repayment term will be shortened. After resale of the vehicle, you can, if you want, contract a classic car credit. The sum obtained after the resale of the car may finance part of the purchase price of the new vehicle.
The balloon credit is an option as accessible to individuals as to professionals. For a company, the use of this financing solution allows the preservation of cash flow.