How Can I Get out of a Balloon Payment on my Car Loan?

How can you end up with a “balloon car loan”?

Several reasons explain why you end up with a balloon loan.

1. Financing over too long a period: Extended financing agreements of five years or more can lead to a “balloon payment.” Even though these agreements appear as a good option at the beginning, by offering lower monthly payments, in fact, by extending the financing period, you end up with a loan balance higher than the value of the car.
2. A higher initial interest rate: Furthermore, many of these loans over more than five years come with a much higher interest rate.
3. An overvalued vehicle: Keep in mind that, as soon as you drive off the dealer’s lot, your vehicle loses value. If it had also been overvalued, the car’s market value at the end of the loan is lower than the unpaid balance.
4. Exchanging a vehicle that carries a balloon payment: In the example above, your balloon payment was $4,000. You want a bigger car because your family is growing. The dealer offers to include your balloon payment when financing your new vehicle. This may sound attractive, but it only contributes to increasing your indebtedness even more.

What are the warning signs that you are caught up in a balloon loan?

• You still owe a large amount on your loan, but your car is worth much less.
• You want to sell your car, but the sale price will not cover the remaining balance of your loan.
• Your payments are too high and eat away a large part of your budget.
• You chose a loan over an extended period (six, seven or even eight years).

This “balloon payment” on your car loan can lead to significant financial difficulties. To avoid spiralling into a vicious cycle of indebtedness, act now by applying the following solutions!

What solutions can help you cope?

• Avoid adding a “balloon payment” to another car loan
  As mentioned above, taking on a new loan that integrates your balloon payment to get a bigger car can lead to indebtedness. This is therefore not the right solution.
• Sell your current car and buy a more affordable vehicle
  Selling your car will allow you to get some money back. Of course, you would need to get a higher price than the loan balance. You will then be able to find a more affordable used car than you can buy in cash or by negotiating a loan with more reasonable terms.
• Contact a Licensed Insolvency Trustee 
  If your debt has become unmanageable, you should call on a Financial Recovery Counsellor who can help you manage your debt through legal solutions, such as a consumer proposal or bankruptcy.

How to be proactive and avoid balloon car loans

• Save to be able to pay cash
  This is not always easy but, ideally, you should save and pay cash.
• Finance a reasonable amount
  If you must use a financing option, beware of loans that run over more than five years.
• Check the resale value before you buy
  Do your homework on the value of the vehicle you plan to buy. Make sure you know its current market value rather than relying on the initial purchase price.
• Make sure you fully understand the loan’s terms and conditions before you commit
  Since interest rates may vary significantly, it is essential that the loan’s conditions are adapted to your budget to avoid any financial imbalance. Before committing to a lender, take the time to weigh the different offers, carefully read the conditions and ask the right questions.

In a nutshell, taking on a “balloon car loan” can result in financial difficulties and even over-indebtedness. To avoid such a situation, it’s better to exercise caution before purchasing a vehicle. However, if you feel overwhelmed by debt, our Licensed Insolvency Trustees are there to help. Contact us as soon as possible. We offer a human, confidential and non-judgmental approach.