What Is a Balloon Payment Lease? Pros, Cons, and What To Do at the End of Your Lease Agreement
When you lease a new car, you have many options for a payment method that works for you, your budget, and your lifestyle. One of these options is a balloon loan payment. While this method can save you money in the short term with lower monthly payments, there are some drawbacks to consider before you choose.
What is a balloon payment lease, and what happens when you select this unique leasing payment method? Learn more about the payment process, benefits and challenges, and what happens when your balloon payment lease ends. With this knowledge, you can determine whether a balloon lease is a prudent option for you.
What Is a Balloon Payment Lease?
A balloon loan payment lease is an agreement where the buyer agrees to make a larger-than-average payment amount at the end of the lease. The buyer makes smaller monthly payments leading up to the final balloon payment. The balloon payment amount can be as much as half of the car’s value; however, this method can help you spend less during the earlier days of the loan and put off the larger costs until later.
If everything goes well, a balloon payment lease can allow you to save up your money while making smaller, more manageable payments throughout the life of the lease. If all does not go well, you may be stuck with a large amount at the end of your lease that you cannot pay. This payment structure has potential benefits for those who can pay it, but it’s essential to learn more before committing to a balloon option.
Remember that balloon payment leases often come with the caveat that you must purchase the car when the lease term is up. Some lenders may also allow you to return the car as long as you commit to financing or leasing another vehicle through them after. Be sure to speak with your lender about the terms for the end of your balloon leasing agreement.
How Do You Secure a Balloon Lease?
If your leasing company offers a balloon payment lease option, you can ask your agent about applying this method before signing the contract. Be sure to discuss the terms, though, as you may be able to negotiate the amount of your last payment upfront, allowing you to control your lease payment amount. This approach won’t necessarily save you any money, but it can help you take ownership of when you pay. Remember that a smaller balloon payment lease may lead to larger monthly payments, while a bigger balloon can limit monthly expenses.
Another thing to remember when deciding on a balloon payment lease is that it can vary based on the residual value of the leased car or the anticipated value that the car would be worth after the lease term based on regular depreciation. This value estimate can determine how much you pay per month and impact your balloon payment amount. Consider negotiating this value amount with the leasing company before signing. This negotiation can help you secure a more manageable balloon amount at the end of your lease.
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What Can You Do at the End of Your Balloon Payment Lease?
When the end of your lease term arrives, you have a few options if you’ve selected a balloon payment lease, including the following:
Pay in Cash
If you can afford the balloon payment at the end of your lease, you can pay your remaining dues and any fees and close out the lease. Depending on the terms of your lease, you may have the option to purchase the car based on its residual value, return it to the dealership, or start a new financing or leasing agreement. It may also be possible to trade in a purchased vehicle for a new ride. Be sure to understand all these potential options before signing anything, as they can vary by dealership and loan provider.
Consider a Loan
If you can’t afford the agreed-upon balloon payment amount at the end of your lease, you still have some options to help you pay for your ride. You can consider a lease buyout loan, providing the additional financing you need to purchase the vehicle. This form of financing, like a traditional car loan, can help you pay for your ride through more manageable monthly payments instead of one large payment.
Before selecting this option, ensure your lease terms allow you to purchase the vehicle. If they do, you can begin shopping around for leases with lengths, terms, and monthly payments that work for you. If you like the vehicle and want to continue driving it, this option can help you get closer to ownership. Know that you are entering another contract, which can include the monthly payments you initially tried to minimize with the balloon lease.
Roll Payment Over
Another option, if you can’t afford your balloon lease payment, is to roll over your payment into a new lease. Essentially, this approach would allow you to “end” the previous lease and begin a new one that absorbs any outstanding fees or payments. A rollover might be a good option if you’re not interested in buying the vehicle and prefer to continue leasing rather than owning it.
Since you’re combining previous lease terms with new ones, you may have higher monthly payments. Some dealerships or leasing companies may also charge an early termination fee if you decide to end your original lease. And, as with any financing option, it’s essential to comb over your agreement multiple times to make sure that this option is available to you at the end of your term.
Use a Credit Card
Even if you cannot meet the requirements of the balloon payment loan at the end of your lease, you may want to select an option that allows you to avoid any more auto loans. If this situation is the case, you can consider putting the payment on a credit card and paying off the balance monthly. This approach can be precarious, though, especially if you don’t feel like you’ll be able to make payments. Often your credit care interest will be much higher than an auto loan interest rate, so only go this route if you can pay off the balance quickly.
You could take on more debt, and high credit card interest rates might make you completely shy away from this option. Still, if you know you can meet the balloon payment lease with just a bit more time, a credit card payment can help you afford the balloon payments without entering any new contracts or financing agreements. Don’t make this decision lightly, but know that you have options even if you can’t afford a balloon payment lease.
Pros of a Balloon Payment Lease
If you’re thinking of using a balloon payment lease, you’ll appreciate some of the following benefits:
Monthly Payment
One of the most significant benefits of a balloon payment lease is that it can allow you to make smaller monthly payments. If you’re low on cash but still need a ride, a balloon payment lease allows you the option to make affordable payments on the way to potentially owning the vehicle. Even if you do have the money, smaller payments can give you more freedom and flexibility to save up or invest for more significant future spending.
Time
If you’re struggling at the moment to afford a loan but know that you’ll be able to afford it at the end of your lease, a balloon lease can help you reach your goals. This point is especially true because you’ll agree to the terms of the lease beforehand, meaning that you’ll know exactly how much you’ll owe and when you’ll owe it. With smaller payments, you may be able to put more away into savings, helping you reach your end goal quickly.
Cons
Of course, you need to consider some disadvantages of a balloon payment lease before committing to one:
Large Payment
Low monthly payments don’t come for free. Instead, you’ll eventually pay it back with a potentially substantial payment at the end of the lease. You’ll need exceptional budgeting skills to meet this payment, but even the most well-honed financial savvy can pale in the face of unexpected expenses. The good news is that you have options if you cannot make your payment. That doesn’t mean you shouldn’t honestly reflect on your ability to make a sizable future payment before signing.
Going Upside Down
In some cases, you can end up owing more on the vehicle than it’s worth at the end of the lease, a situation known as going upside down. This situation can happen with a balloon payment lease because you’re making a small monthly payment that may not keep up with the car’s depreciation rate. At the end of the lease, you may end up paying more for the ride than it’s worth, or you may have to walk away from it without the option to buy.
Interest Rates
Depending on the specific terms of your balloon payment lease, you may end up with higher interest rates than a traditional financing or leasing agreement. This situation occurs because the large payment at the lease’s end makes it riskier than other options. In addition, you may be forced into an unfavorable interest situation if your inability to pay the large balloon payment in the end requires an additional loan or rolled-over lease option.
Should You Choose a Balloon Payment Lease?
Selecting a balloon payment can depend on various factors and circumstances. If you feel confident that you would be able to make a large payment at the end of your lease term with a small monthly payment throughout, you may want to think about it. Even if you can’t make the payment, you do have options. But this decision is risky, and you don’t want to put yourself in a challenging situation if you’re not confident in your ability to pay back in full within the loan term.
Don’t Be Afraid to Negotiate with an Agent
The good thing about any leasing agreement is that you can speak with your leasing agent about your options before committing to anything. When you do, ask any questions and ensure that you understand what you’re required to do at the end of your lease. You can also feel free to negotiate with your agent for terms that work better for your lifestyle for balloon payment loans.
Balloon payment loans are one of many options that you have when you choose to lease a new ride. With smaller monthly payments but a larger payment later, this option is risky, but that doesn’t mean it can’t work for you. Be sure to consider your options carefully, reflect on your ability to make the payment, and determine the next steps when you’ve satisfied your lease. If you follow these guidelines, you’ll make a choice that gets you on the road comfortably in your dream ride.
Finance Editor
Jim Slavik is a financial services expert with 30 years of strategic and operational experience including leading underwriting, loan administration, customer service and collections. He has held C-suite credit operations roles for Fortune 100 and private equity companies for credit cards, personal loans, lease-to-own, auto loans, mortgages, and insurance for prime and sub-prime borrowers.
Currently Mr. Slavik is an independent financial services consultant for private equity firms and a contributor for expert networks such as GLG, Guidepoint, and Level company amongst others.
