Car Buying Secrets

Balloon Notes - Balloon Note Financing - It is back, why?

By: Roosevelt Gist

Buying a car is the easy part. Trying to understand the different types of financing is the tricky part. All you have saved during your fierce negotiations can be lost by not getting the proper financing.

Traditional lending will require a large down payment and higher monthly payments. You are listed as the owner on the title. All the risks of ownership falls on you. Not the lender. Auto leasing counters this because the payments are lower and the down payments are minimal. But, some of the liabilities and risk remain with the lender, they’re the owner.

In comes balloon note financing. A hybrid of the traditional loan and lease - a look alike product. Lenders like the balloon loan because it has the features of a lease, offers higher yields, longer average lives before pay off, stronger applicants and reduced competition.

Consumers like the balloon note because you are the owner, the selling price of the vehicle and interest rate must be disclosed and you could payoff the loan at any time and not pay more than the loan value.

Balloon note financing has not really caught on with consumers because of the higher interest rate, you may have to pay sales tax upfront and greater total finance charges, even if the monthly payments are lower because they are calculated similar to a lease using residual values.

Also the dealership’s sales staff does not know how to explain the balloon note, objected to disclosing the cars selling price and disclosing the interest rate. Leasing the car to a customer offered greater incentives to the salesperson because the car could be sold at a higher price and no disclosure required.

There are some tax advantages associated with balloon note financing but that’s beyond the scope of this column and you should seek advice from your accountant.

Balloon notes are on a come back. Lenders and manufactures are quietly introducing them in the market. Why, I don’t know. But, it could be because in some states lessors are being held liable because they own the car. You and the salespersons have enough problems with understanding leasing. So, beware of that "lower monthly payment" you’ll start seeing from the salespersons.

Questions to ask the salesperson: Is this a balloon note? Are these residuals insured as with a lease? What is the interest rate? What is the purchase price of the car? Do I have to pay sales tax upfront?