There are several things that you need to know about. One of these is balloon payments. Also known as a residual payment or RV, it is a lump sum that is owed to the lender at the end of a loan term after all the regular repayments are done. By leaving some of the loan to be repaid at the end, you lower your monthly repayments. The size of the balloon payment affects what you need to pay on a regular basis, and it is the remaining balance at the end of the loan.

Here are some of the things that you need to know about balloon payments for car loans:

  • A balloon payment makes monthly repayments more affordable as it usually accounts for a large part of the balance of your car loan. Since it results in reduced monthly repayments, it can make it easier to manage your cash flow.
  • The size of the balloon as a percentage of the loan varies depending on the lender as well as the type and age of the car.
  • It’s essential to know your options when you reach the end of your loan term and you need to make the balloon payment. The first option is obviously to pay it in full. That eliminates your full debt right away.
  • If the debt is too large for you to pay off, a second option is refinancing. You can take out a new car loan with your lender or a different lender, making monthly repayments for the balloon payment. 
  • If you cannot afford to pay the residual value or you don’t need the car anymore, you can sell it and use the money to pay off the balloon payment.

These are some of the things that you need to know about balloon payments and car loans. As with any major purchase, do your research before signing any contract. Make sure that you can afford the repayments and have a solid plan for how you will repay any residual value.