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
You are borrowing more than just the anticipated depreciation, so the $20k payment in your example won’t eliminate all the finance charges.
Briefly, I’ve been doing some snooping with them and similar products from credit unions.
As @trism said, I think they’ve been quietly axed.
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No, but the single upfront payment should reduce the finance charges.
I’m assuming that I’d be paying the APR on the “residual” over the entire term the loan is outstanding.
What are the chances I can get someone at PenFed to send me a sample note to review?
Before you answer:
As best as I can tell this is correct, …on a balloon you pay finance charges on the total loan amount.
Looking at the PenFed calculator, the loan amount minus total monthly payments is always a lower number than the balloon amount, meaning the balloon is accruing interest as well.
So if you did a $60k balloon and immediately paid $20k as your first payment, the loan would then be accruing interest at $40k * APR for the remaining months, as opposed to $59.5k or whatever * APR.
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How do you figure?
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Sigh, it’s been way too long since I manually calculated one of these…
Rent charge = mf * (adjusted cap cost + RV)
The adjust cap cost and the RV are summed as part of the running average, as the rent charge amount is a finance charge of the average “loan” amount as it decreases from the adjusted cap cost to the residual value. It’s a bit easier to see if you decompose the mf with the 2400 factor to convert to equivalent APR.
No I gotcha, just a morning brain fart, for some reason I had it in my head that it was CC minus RV, not plus, hence it’s been too long…
I figured you were on board, but added the rest for the digestion of others in case someone comes across this while searching.
Ha! That’d be the day.
Not the answer to the question you asked, but if it’s a MB/BMW/Audi etc CPO keep this in mind: even with low mileage you’re potentially looking at a ton of depreciation on a MY18 or newer model.
Penfed allows only the last two model years for this program so pretty soon MY19 will be the oldest you can get
Fair point, and that’s on my radar.
I was actually thinking about getting something with relatively high mileage for its age, since I’ll add so few miles to the odometer.
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