Buying a new vehicle is a significant investment. To enjoy the benefits of a recent and safe car, many individuals are turning to balloon credit.
Balloon credit is an interesting financing solution if you like to change vehicles regularly. Very close to the rental option (LOA), this type of credit is particularly suitable for households on tight budget. What should you think about balloon credit? Response elements.
Definition and operation of the balloon credit
Like a LOA, the balloon credit does not make the subscriber the owner of the vehicle. Specifically, the dealer makes available a new car in return for the payment of monthly payments that span a period of 12 to 48 months. These are only interest related to the loan. The balloon credit requires a substantial contribution, between 10 and 20% of the total cost of the vehicle. This amount must be paid when the contract is signed.
At the end of the rental period, several options are available to the borrower:
- Buy the vehicle for a sum that has been previously defined. This cash value is called the “balloon”.
- Return the vehicle to the dealer and receive a balance from any account. The subscriber can then, if he wishes, contract a new balloon credit for another vehicle.
- Resell the vehicle and use the proceeds of the sale to repay the credit due.
- Renew the lease for one to two years.
Thus, although the balloon credit does not make the subscriber the owner of the vehicle, it is indeed a car loan whose operation is similar to that of the LOA.
Subscribe a balloon credit: the benefits
Less common than the traditional loan, the LDD and LOA, the balloon credit however has many advantages.
Lower monthly payments compared to conventional credit
The monthly payments to be made in the context of a credit balloon are lower than in that of a conventional credit. Indeed, they are composed only of interest.
Driving with a new or recent car
With the balloon credit, the borrower has the opportunity to ride with a new or recent vehicle. This allows you to enjoy greater driving comfort and reduce maintenance costs. The driver can re-engage at the end of each contract to get a new vehicle.
Multiple output options
The balloon credit is characterized by its flexibility of operation. When the rental agreement comes to an end, the subscriber has great freedom: return the vehicle, resell it, buy it or renew the contract.
Buying a car with a balloon credit: the constraints
Very attractive in the short term, the balloon credit is to be handled with care. It is important to calculate the total cost of this operation. By adding the monthly payments and the initial contribution, this formula can finally cost more than a conventional credit. In addition, at the end of the contract, no amount is returned to the borrower who must then “start from scratch”.
When signing the contract, the borrower commits to a quota of kilometers not to exceed. This limit can be binding on use. Motorists who do a lot of road have therefore every interest in avoiding this solution.
Finally and unlike the LDD, maintenance costs are not included and remain the responsibility of the driver. These expenses can nevertheless be limited since the car is new or very recent.