Just got back from the jeep, test drove the Wrangler because I really want one…Salesman told me about Jeeps “Smart Buy” which he said is just balloon payments or residual based financing. The way he described it was kind of confusing and the articles I read online are also confusing I was just curious if anyone could shed some light and maybe let me know if it actually is a good idea to do this for a Wrangler or not…thanks in advance and I apologize if this is in the wrong section.
They’re probably talking about a loan product something like this:
https://www.penfed.org/auto/payment-saver
With some (not that one 
) you can walk away at the end, like a lease.
You’re better off leasing over ballon payments.
Is your end goal to buy the Jeep?
I’ve run into this quite a few times. They seem to be very popular with Jeep dealers in particular.
I did a lot of digging to find more info about these loans here in NY, and wasn’t able to find much. It appears they are simply high interest and operate the same way as a lease where you can give the vehicle back at the end of your agreed upon term (not all lenders do this though).
From what I was proposed, dealers use this to hit desired numbers. So say your target payment on a lease is $400 for 36 months but they’re pricing out $500+. They pitch this balloon loan payment at $375 but at a 72 month term. I saw a couple take this hook line and sinker, simply because of the payment.
It’s just a repackaged and relabeled version of a lease. In some cases it makes sense, others it doesn’t.
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Maybe eventually I’m not quite sure…from what it seems is that I could structure it like a lease, pay it through the terms, and then it leaves me with a decent buy out option at the end because i could refinance the remaining value and pay that out. With a wrangler it doesn’t seem like a half bad option but then again I didn’t even ask for numbers because my current lease isn’t up for another 5 months. Just wanted to gather some info now.
Thank you so much. I think when I actually go ahead and start looking at numbers for a wrangler I would put the numbers side by side and see which offer makes most sense for me at the time. Still 5 months out.
Balloon loans may make your monthly payment lower but you’ll owe an agreed lump sum at the end. You still pay the same money.
If you don’t have enough cash to pay the balloon payment when it’s due, you’ll need to get another loan, either by bank or refinance, paying more interest for a longer period of time so in the end it could cost you more. The only real “benefit” you get is a lower monthly payment but it’s smoke and mirrors, making it seem you can afford more car than you can. If you can’t afford the monthly lease payments you probably should be looking at a less expensive car. Risk vs reward is not there with a balloon. I wouldn’t recommend them and my opinion is to stay away from them.
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This helped significantly actually thank you so much. Just needed someone to break it down for me and give me their honest opinion.
What is the benefit of this vs lease? Seems like losing out on the best part of a lease of just walking away at the end of the term.
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To make the monthly payment as small as possible. As you said, unlike a lease, all the risk isn’t on the lender.
With the caveat that my first “lease” was a ballon (Subaru/Chase) at less than prevailing loan rates (subvented), and at that time Chase took them back so it operated much like a lease:
When you are in a purchase process for anything, and someone offers you a financial instrument you don’t understand, it’s a sales tactic. Kudos to @msweet28 for test driving 5 months out, asking questions, doing research.
Not to say it might not make sense to someone, but a salesperson (who themselves probably can’t calculate a lease by hand) didn’t discover gold in the Dakota hills, they have a product that makes your payment lower, and by the time you discover if it worked well or not, they are likely to have moved on.
Same applies for mortgages: we have an entire thread in Off Ramp on mortgages. Interest Only loans make sense for SOME people (not most), it’s a financial product designed for rich people whose houses are paid off, but need that mortgage interest deduction. A lot of people got into them under the (later proven false) pretense that real estate never goes down. While they got popular prior to the housing crisis, another instrument appeared: NegAms (negative amortization loans) where you weren’t even paying the entire interest every month, and your principle was growing! Don’t fret though because real estate never goes down (whoops)!
The people who didn’t understand IOs and NegAms in 2004-2007 got caught holding a burning bag. They signed for something they didn’t understand.
There a small number of scenarios a ballon might make sense. For the average consumer in this economy, I wouldn’t even run the numbers.
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Thanks for the detailed response. I don’t pretend to be good at this stuff but I figure if Im even questioning if I can afford a lease or financing then I can’t afford it period.
Why this resource is here: ask questions, get different perspectives and advice, but ultimately make the best decision for yourself. I have a lot of friends who work at a car dealership, but their job is to sell you a car. The best thing you can do before you enter the last stage of that process is to educate yourself.
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I really appreciate all the help on here. I just think knowledge is power in this (and honestly most) situation(s) so I want to go into negotiating my next lease with every bit of information I can gather. Everyone on here is super helpful.
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Random idea about using this type of financing instead of a lease… Forget about whether the numbers in my example are realistic, I’m just wondering about the calculation of finance charges.
I’m itching to replace one of our vehicles, but I’m having trouble justifying a new vehicle lease because of how little the car will be driven (best estimate is 2,500-3,000 miles a year).
Let’s say I find a CPO [insert name of car here] for $60,000, and it’s projected to be worth $40,000 in 36 months when the balloon payment is due.
Can I avoid a big chunk of the finance charges by making a single $20,000 payment shortly after the loan is originated, or am I on the hook for the sum of the 36 scheduled payments in addition to the balloon payment?
The biggest problem with this type of loan is that you don’t (usually, maybe some loan product has an answer for this) have the ability to give the car back when the balloon is due. It’s not like a lease where you either accept the buyout price, or return the car.
With the balloon, you’re on the hook for that residual value, regardless of the actual value of the car.
If the car ends up being worth less than the bank valued it at at the beginning of your loan (i.e. due to a repaired accident that taints your CarFax), you can’t escape the car without negative equity.
In this sense, a balloon loan is more like a traditional LOAN/finance deal, where YOU are taking on the risk of the car’s depreciation, versus the leasing bank taking on that risk.
One of the greatest benefits to leasing is that you don’t lose any additional money if the car is in an accident and its value is reduced. You may lose the chance to trade it in versus grounding the lease. But, as far as I know, there is no “grounding the car” option on a balloon loan. That balloon payment is your responsibility just as it would have been if you took a 60/month traditional finance loan.
You might win on your gamble, your car may appreciate above the residual value and it could be no problem, but I’d never recommend taking on a balloon payment if you can’t afford the 60month finance payment on the same car.
I understand the risks, benefits and tradeoffs of buying vs. leasing.
If I choose not to lease, steal, borrow or rent my next car, the most logical choice is to purchase, and whether I do a balloon loan or write a check for the car, the downside risk on the car’s value is the same.
I’m just trying to understand how finance charges are calculated on this type of note.
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I haven’t found conclusive evidence but I have seen things that suggest that you are free to pay as much as you’d like each month. Since you won’t be paying off the full loan with that 20k, technically they can’t hit you with a prepayment penalty (if one exists) so yes it theoretically could work.
You talking about the walk away penfed balloons?
Did Penfed add a walk-away option to their balloons?
To the best of my knowledge, PenFed dabbled in these for a few months and then quietly discontinued them.
My question about finance charge calculation would be the same either way. I’d still want to save the finance charges if the amount was large enough.
APRs right now are in the high 3%-low 4% range for the shorter initial terms. https://www.penfed.org/auto/payment-saver