Another Financing option

[rvillano8188]

Hey All,

So when I was at the dealer yesterday talking about my ordering intentions, the finance manager mentioned a balloon financing option. Essentially you would kind of have a hybrid of lease/financing where you’d be paying off more principal than a lease, and then last payment would be a balloon payment of 20-25k, when you would then have an option to try to sell the car, or refi it.

Generally as someone in finance, I’d say this is a disastrous move, but with the thoughts on residuals so far, it might be a great option for many of you on the fence. My local credit union is working with the dealership and offering this option on a 36,48,60, and 72 month financing.

Anyone ever do this on a high residual car before? Thoughts?

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[ACAD_Cowboy]

I've seen this done on some low volume high cost german cars, you acquire it on a lease for low monthlies and then roll the balloon payment into a traditional finance term but this is usually only effective when the car payment represents a large fraction of your monthly wage and other expenses are minimal, IE young men who want fast cars to attract young women who themselves are trying to attract older men with expensive cars.

In example, it would let you get into a E500 without going broke and then when 3 years is up, you are financing a used CPO E500 or leasing another car. But with the startling lack of depreciation your typical wrangler family vehicle shows, the dealer has a very small margin to play with on the financial side. With the previous E500, it would be worth considerably less than the final pay off value on the lease, thus the dealer puts a lot more cash in their pocket and the car goes straight to auction. With a wrangler, they would rather you refi the balance and keep it off the lot.

I'd personally sidestep the balloon payment mess and all the problems leases have like mileage charges, wear and tear etc and just go for a longer traditional financing term even though it will cost a point more on the rate. My credit union is will to write 96 month terms right now which is bonkers except when you look at how much value you hold relative to street pricing. My current loan, I owe about 3/8th of street pricing and stand to realize a huge down payment such that trade in is almost pointless.

 

[PsyRN]

Hey All,

So when I was at the dealer yesterday talking about my ordering intentions, the finance manager mentioned a balloon financing option. Essentially you would kind of have a hybrid of lease/financing where you’d be paying off more principal than a lease, and then last payment would be a balloon payment of 20-25k, when you would then have an option to try to sell the car, or refi it.

Generally as someone in finance, I’d say this is a disastrous move, but with the thoughts on residuals so far, it might be a great option for many of you on the fence. My local credit union is working with the dealership and offering this option on a 36,48,60, and 72 month financing.

Anyone ever do this on a high residual car before? Thoughts?

how is this different then doing a lease to buy option? kind of sounds like it to me.

 

[rvillano8188]

how is this different then doing a lease to buy option? kind of sounds like it to me.

Maybe we're calling it different things, but could be the same process. I just believe that because your intent is to purchase the vehicle at the end, the interest rate is lower because the bank carries less risk than you do. My belief was every "Lease" has an option to buy at the end, but you pay a higher rate due to the bank carrying residual risk.

plus I believe the terms are longer than your standard lease (You can go as far as 60 months with this option. I also found the interest rate to be about 1% lower on this option. The way it was explained to me is that the balloon at the end of this cannot exceed 80% of residual value.

Example (just pulling numbers out of thin air, so take it for what it's worth)
DISCLOSURE: didn't include Sales Tax, Use Tax, Disposition fees for leases, dealer fees, etc. so this discrepancy could actually work out even more in the balloon loan's favor:

Balloon Loan
50k JT
Residual is 67% after 42 month loan (33,500)
Balloon would be 26,800k (80% of 33,500)
Payments would be 592.87monthly($23,200@ 2.99%(Taken from my local Credit Unions Website)), and at the end of the 42 months, you would owe 26,800k, which you can then do the following: Pay it off in full, try to sell the vehicle for more than 26,800, or refi the loan out.

Lease
same 50k JT
Residual is still 67% after 42 month lease (33,500)
Money Factor is .0018 (Considered pretty good and would equate to 4.32% Interest Rate)
Payment would be $557.00
At the end of 42 Months, you would owe $33,500 and would either trade in the vehicle, or buy it out in full, or finance it as a used vehicle purchase.

Now there are a few things that I considered.
1. it's risky for you vs the bank, especially if the residual doesn't match up to vehicle value (Wrangler/Gladiator or a one off special edition vehicle is the only way I'd consider this loan)
2. Interest Rate. 1.32% is pretty significant, and that savings gets redirected straight into equity of your vehicle.
3. Sales/Use Tax/ Disposition Fees - Lease fees could be significantly higher than financing.

 

[Heathsrow]

What credit union is offering this?

 

[rvillano8188]

Teacher’s Federal Credit Union (don’t have to be a teacher). Haven’t checked other ones, as the 2.99% rate is pretty awesome

 

[Brains2k]

https://www.penfed.org/calculators/payment-saver-calculator PenFed has that option as well .. I use them for my current car and it’s a great CU

 

[Rover_boy]

If your intent is to purchase, just straight finance. 6 yrs if need be. Its better than the balloon payment. Just do an amortization on the loan and look at how much you owe at the end of the balloon term. At the end of that "lease", you still have to finance $23k.. you're going to finance it in 5 yrs anyway... thats 8-9 yrs of payment.... My $0.02

 

[rvillano8188]

If your intent is to purchase, just straight finance. 6 yrs if need be. Its better than the balloon payment. Just do an amortization on the loan and look at how much you owe at the end of the balloon term. At the end of that "lease", you still have to finance $23k.. you're going to finance it in 5 yrs anyway... thats 8-9 yrs of payment.... My $0.02

So here’s the thing, that’s not entirely correct. Let’s say you balloon, at a lower rate, but you calculate the payment as if you’re paying the straight financing number and just make that payment instead. That would effectively pay down principal quicker than straight financing as less interest is being added onto the amortization (it was 2.99% balloon vs 3.49% straight financing), and it gives you downside protection in case you couldn’t afford the higher initial financing payment (not a huge difference but a savings nonetheless). You’ll actually save money over financing.

For those who have this available in their area, and are looking for another option, this could end up being a slightly cheaper cost of ownership.

 

[Rover_boy]

So here’s the thing, that’s not entirely correct. Let’s say you balloon, at a lower rate, but you calculate the payment as if you’re paying the straight financing number and just make that payment instead. That would effectively pay down principal quicker than straight financing as less interest is being added onto the amortization (it was 2.99% balloon vs 3.49% straight financing), and it gives you downside protection in case you couldn’t afford the higher initial financing payment (not a huge difference but a savings nonetheless). You’ll actually save money over financing.

For those who have this available in their area, and are looking for another option, this could end up being a slightly cheaper cost of ownership.

Hhmm.. I'm not seeing it... can you provide an example?

 

[rvillano8188]

Sure. So #1 is Financing, and # 2 is Balloon. This is straight comparison. There are other values in going balloon financing, but lets focus on apples to apples.

#1 - 50k @ 60 Months @ 3.49% Financing = 909.36/month
$4559.18 in Total Interest paid.

#2 - 30k @ 60 Months @ 2.99% Financing = 538.93/month (Balance of 20k due at 60th month). Additional monthly principle payment of $333.33 made as well (to pay off the 20k principal balance that wasn't supposed to be touched. 20k/60 months). Total of monthly payments would be $872.26.
$2334.29 Total Interest Paid and would still achieve paying off full vehicle, but the 20k "Balloon" wouldn't have been subjected to the interest rate in question, as it's not being initially financed.

So you're saving on the lower interest rate, plus the savings of not paying interest on 20k. Does that make sense? Am I just rambling, but completely wrong?

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