A balloon payment on a car loan is a lump sum that is paid at the end of the loan term in addition to the regular monthly payments. This lump sum payment is usually the amount of the remaining loan balance and is usually due when the consumer wants to keep the vehicle. Balloon payments can be beneficial for those who can afford to pay off the loan in one lump sum but also want to keep their monthly payments lower.
You finance a $50,000 vehicle over five years with a 30% ($15,000) residual value.
This means you pay off $35,000 over the five-year term of the loan, with the remaining $15,000 paid out as a balloon payment at the end.
You can also refinance the balloon over a second term, typically two to three years for a motor vehicle. You can extend this up to five years for items with a higher residual value.
Put simply, a Residual Value and Balloon Payments on car loans are the same. Both refer to a pre-agreed payment due at the end of a loan for a vehicle or machine.
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