If a costly new car is to be financed, then a car loan with a closing rate, which is also called “balloon credit”, is a frequently chosen form of financing. The following article discusses the pros and cons of a car loan with a closing rate and includes all the important aspects that you should consider as a borrower.
How does the car loan with closing rate
For a car loan with a final installment, a fixed interest rate and a fixed repayment term are first agreed between the lender and the borrower. The amount of the monthly installment is based on the individual ideas of the borrower and not on the probable loss of value during the term of the loan – as is the case with the classic leasing contract. The credit agreement is calculated in such a way that the remaining debt at the end of the repayment period coincides with the residual value of the vehicle ( prerequisites: normal use of the vehicle and repayment without special repayments). The residual value calculated at the time the contract is concluded at the end of the term represents the final installment, which can be repaid by the borrower in different ways. On the one hand, it is possible to repay the entire installment in one step so that the vehicle passes directly into the ownership of the borrower at the end of the term. On the other hand, there is always the possibility of completing follow-up financing (either directly from the manufacturer or dealership or from a conventional bank).
The advantages and disadvantages of a balloon loan
Due to the special features, there are different advantages and disadvantages for the car loan with final installment. First of all, it is of course beneficial for the borrower that the amount of monthly loan installments is significantly lower compared to a traditional car loan. This is due to the fact that the calculated final rate with regard to the loan repayment is virtually excluded. In addition, the amount of the calculated final installment does not have to bear interest during the term of the loan, which of course has a positive cost effect (especially for high-priced new cars with a correspondingly high residual value or high final installment). In addition, the conditions for a car loan with a final installment compared to a conventional car loan or personal loan from the bank are usually lower.
This is simply due to the fact that the manufacturers or car dealers subsidize the interest rate, because they want to stimulate by the financing of the balloon loan, in particular, the profitable new car business. In terms of disadvantages, there is actually not much that you have to say a car loan with closing rate negative. In principle, borrowers simply need to be aware of the amount of the final installment and the due date. The inclusion of a balloon loan should therefore always be associated with a certain planning to ensure a smooth repayment. However, as there is always the possibility of “loan extension” in the form of follow-up financing, the amount for the final installment does not necessarily have to be saved during the repayment term. It is important to bear in mind, however, that there is, of course, an interest rate risk for the amount of the final installment at the end of the term. After all, the interest rate level after 48, 60 or even 72 months may, of course, be completely different.
Tips and tricks for a car loan with final installment
When financing a balloon from a valuable and in this respect expensive new car (for the used car business, the financing form is often not offered) should be a borrower in any case worry about the return of the calculated final installment. Of course, in most cases it is also advisable to make special repayments during the term of the loan, thereby reducing the level of the final installment. For this, of course, it must be ensured at the conclusion of the contract that the lender also grants a special repayment right required for this purpose. Anyone who does not want to commit themselves directly during the term of the loan, whether he uses free funds for repayment, of course, also has the option of at least a part of the later final installment secured by reserves on a savings account or savings account. Another tip to make the repayment of a car loan with final installment cheap and easy, is the hedging of follow-up financing by the conclusion of a building savings account.
It is ideal as an interest rate hedging instrument, especially since most building societies, for example, up to a loan amount of EUR 30,000.00, offer blank loan, which do not have to be secured in writing and can be recorded without proof of use. When concluding a building savings account to secure the final installment, care should be taken to ensure that the amount of the home savings loan also exactly matches the expected final installment. In addition, you should immediately create a digital allocation calculation at the time of signing, so that you can also demonstrably see that balances and home savings loans are also available when the final installment is due.
Conclusion: The car loan with final installment is a special form of financing, which is also called balloon loan and is used in particular for the purchase of expensive new cars. The monthly installments are initially lower for a car loan with closing rate, but it is clear from the outset that at the end of the repayment period, there is still a residual debt, which is due immediately. The borrower has two options at this point: either he directly returns the closing rate, for example through accrued reserves, or he extends the loan by completing follow-on financing. The conditions offered by manufacturers and dealerships are usually lower for a car loan with final installment than a conventional car loan. The form of financing is therefore quite attractive, but you should always combine the conclusion of a balloon financing with a certain planning. The follow-up financing for the final installment can, for example, be hedged using a building savings account so that there is no interest rate risk until the end of the repayment term.