Balloon Payments Making a Comeback in Auto Sector as Car Prices Keep Accelerating

For all the trouble balloon payments caused in the housing crash of 2008, used properly, such loan terms can be a viable option for lowering monthly payments, especially on costly cars.

An example of the resurgence of balloon payments in the auto sector comes from Toyota Financial Services Philippines (TFSPH), which is now promoting its Balloon Payment Plus financing option as an alternative to generally more expensive auto leases.

As reported by The Philippine Daily Inquirer, “Balloon Payment Plus, a unique finance lease product by Toyota Financial Services Philippines (TFSPH), offers customers low monthly payments compared to regular financing; Periodic Maintenance Service throughout the loan tenure for worry-free maintenance,” and an upgrade option at the end of the loan term.

To take advantage of the program, consumers first select a down payment equal to a 20%, 25% or 30% down payment of a vehicle’s suggested retail price (SRP), then decide the duration of the loan, which can range from 24 months to 60 months.

At the end of the financing period, consumers can pay off a lump sum that can be as much as 45% of the value of the car and own it — that’s the “balloon” — or do a trade-in.

Toyota’s main website contains basic information on the Balloon Payment Plus program, which is available in markets outside Asia, although no specifics are provided.

Melbourne, Australia-based finance broker National Loans is also promoting balloon loans for autos, noting in a statement: “Balloon payment car loans are well-suited to those who like to upgrade their vehicle often. If trading in the vehicle at the end of the loan term is the buyer’s preference, National Loans recommends choosing a balloon loan that is a similar size to the cost of the vehicle’s current value and to trade in the vehicle when it reaches the breakeven point. This is when the trade value of the car is in line with the settlement amount owed.”

At a time when used cars are scarce and expensive, and with new car prices also running ahead of recent years, balloon financing that offers very low monthlies are attractive to some drivers.

In October, The Wall Street Journal (WSJ) reported that “U.S. consumers paid an average of $42,368 for new vehicles in September, up 17% from the same month last year, according to a preliminary estimate by data provider J.D. Power.”

See also: Car Apps Add Vehicle Financing to Acquire, Retain Customers