Better Than a Lease? A Balloon Loan Primer

This wiki has now reached open status. The purpose of this wiki is to consolidate balloon loan guidance and help the community better understand this alternative financing option. Anybody, with proper trust levels, can edit this wiki and contribute additional content.

What Is the Upside of Using a Balloon Loan…

A balloon loan (BL) combines features of a lease with features of a traditional or conventional loan. It typically provides for a lower payment option, based on the RV of a vehicle, like a lease, while keeping the title in your name, like a loan.

One way to use a BL is to combine a short term (24/36 mo) with a large down payment. Where you have a strong initial RV, you can often put enough down so the loan balance starts very close to the RV. This makes the payments VERY small, as you are effectively paying only on the debt service.

Another way to use a BL is to opt for no down payment and the longest term possible (72mo+). Where you have a strong RV over time, this approach can also lead to very small payments, as you are spreading repayment between current value and residual value over a long time period.

Other general advantages of a BL include;

  • With many banks restricting lease disposition options, a BL can help ensure access to positive equity that may otherwise be trapped.
  • Since you are the owner, plates and registration can be transferred, which is a nice savings in many states.
  • In some cases, better rebates or incentives maybe offered with a purchase, which a BL can capture.

In the end, you are often trading higher total costs for lower payments. For those who value total cost, often a BL is not a good fit, while for those looking to maximize monthly cash flow, a BL maybe the most practical option [non-withstanding a future wiki on margin loans].

What Is the Downside of Using a Balloon Loan…

The most obvious downside, is that you are on the hook for the final balloon payment at the end of the loan term. Unlike a lease, where the vehicle is returned, in most cases, with a BL, the owner is responsible for satisfactorily disposition of the vehicle (pay, sell or refinance). This implies significantly more risk then with a lease, where you can return the vehicle, or with a loan, where you will eventually own the vehicle outright.

Other downsides:

  • In most states, you will need to pay full sales tax upfront, so no tax advantages, like a lease. If you happen to live in a tax friendly state (eg; Oregon) or any state offering an exemption for certain vehicles (eg; NJ and EVs) this can be a non-issue.
  • BLs general do not residualize options very well. The best build for a BL is a base trim level, so if you want a highly optioned vehicle, find one where the trim include all your options.
  • The interest rate is usually one point higher versus conventional financing. For high end vehicles over $70K, there is an additional origination fee which can vary by lender.

The Right Conditions for a Balloon Loan…

Once you have decided that the risk and rewards of a BL align with your personal financial strategy, the next step is to understand if your target vehicle is a good candidate for a BL. Generally, this option is best in cases where:

  • short term ownership is desired,
  • a vehicle posses significant positive equity, or
  • where one finds a favorable program MRM/RV for a vehicle.
  • where long term conventional loan cannot be used.

Here are examples where I have used or suggested a balloon loan:

  • Challenger, Dodge was still offering power dollar rebates with a purchase, but not with a traditional lease. Using the balloon loan qualified me for thousands in additional rebates versus a CCAP lease.
  • Tesla M3, it’s about the ability to sell the vehicle, at any time, and not be forced to return it to Tesla. This allows me to recoup the equity locked in the vehicle, which would otherwise be lost w/ a Tesla lease.
  • Dodge RAM TRX - takes advantage of a favorable gap between purchase prices and MRM.
  • Toyota Tacoma TRD Off Road V6 - takes advantage of a strong RV.
  • Jeep Cherokee Latitude Lux - takes advantage of a strong RV.
  • Chevrolet Camaro ZL1 - takes advantage of a strong RV.

Where can I get a balloon loan…

Only one wholesaler offers balloon loan programs, Auto Financial Group (AFG). However, AFG does not offer the program direct to the public, instead the program is offered via affiliated credit unions. Thus, all credit unions who advertise balloon loans are all reselling the same AFG program, but may charge different rates and/or fees. The below list provides suggestions for credit unions where membership is open to the public.

  • Hanscom Federal Credit Union (https://hfcu.org/) Better then a lease loan offering is backed by AFG. Membership to the CU is possible via a $35 donation to Nashua River Watershed Association. Uses transunion credit for score.

  • CapEd Credit Union (https://capedcu.com/) They offer a payment saver loan option.
    Membership to the CU is possible via a $20 donation to CapEd Foundation. Uses transunion credit for score.

  • AmeriCU Credit Union (https://americu.org/) Membership Requirement: $15 one-time donation to American Consumer Council. How to apply: You need to call to apply, no public calculator. Uses experian for credit score.

Regional options to consider:

  • SEFCU (NY),
  • MountainCrest FCU (WA),
  • Vermont FCU (VT),
  • Frankenmuth CU (MI)
  • Greater Nevada CU (NV)

How Do I Use A Balloon Loan Calculator…

  • AFG Default Payment Calculator AFG Calculator Use this calculator first, to determine the loan balance, rate and payment for your preferred term. Here is what this calculator looks like setup for a Ford Mach-E purchase in NJ.

Given the 72mo payment from the previous screen, we can solve for the final balloon payment, if we held to the end of the term.

image

Given the 24mo payment from the previous screen, we can solve for the final balloon payment, if we held to the end of the term.

image

Acronym’s & Terminology used in this wiki

MRM / CRV - This is the retail value of the vehicle assigned by AFG.
Purchase Price - This is the price you can purchase the vehicle from a dealer.
Down Payment - Upfront funds used to reduce the loan balance.
Total Amount Finance / Loan Amount - The amount of the loan you require the bank to provide/approve.
Conventional Rate - The rate commonly offered on traditional finance.
Balloon Rate / Annual Interest Rate - The rate offered with the balloon product.
Annual Mileage - Mileage affects the residual value of the vehicle.
Residual Value / RV - The forecast value of the vehicle at the end of the loan term.
Number of Months - The term options for the loan.
Monthly Payment - The payments associated with a loan term.
Balloon Payment - The final payment due at the end of the loan term.
MMR - Manheim Market Report, the wholesale value of the vehicle at a given point in time.

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AFG Hot Sheet for Jan/Feb 2022

This list suggests which new vehicles may best benefit from using a balloon program.

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Thanks for the write up. Looking forward to learning more about balloon payments as I may use one for my next purchase

Not sure if this can be included with balloons, but lightstream allows auto lending without lien on title for up to 100k, LTV values still apply.

Potentially useful for short term flips where you do not want to provide capital and need to purchase the car. Most useful for individuals living in tax on sales price states like MD, VA, TX, etc. as you will be able to flip without the restriction of third party buyouts, and claim EV Credits as long as you are not ‘intending to purchase for resale’.

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Fantastic post and @z0lt3c helped me a lot when I was getting a BL for a Tesla MYP. I used SEFCU since they are one of my local CUs and they have been fantastic. Their rates are still at 2.49% for 24 months and very easy to work with. No hard credit pull either.

If you are in NY, and qualify for membership, it’s a no brainer.

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My favorite balloon program right now is on a 2022 Ram TRX. It already offers a tremendous amount of positive equity, when purchasing from a forum vendor, but if you are looking to hold onto one of these, and not just immediately flip, the MRM offered by AFG, for a base TRX, is just under $92K. Where-as, it’s possible to purchase this vehicle OTD for $69K.

That would put a 24mo payment in mid $500’s.

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I tried your calculators on '23 Defender 110S with $63k sticker/selling price and it also looks attractive, I think. But dunno what the MMR is.

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Really really strong. Just ask @mattevan

Wheels+Air Suspension+Pano though is needed at a minimum to get close to full MMR. Defenders w/o the air suspension often take a :poop: at auction

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Can I do this in CA from an out of state dealer? If so I’m in
Driving trx on a budget sounds too good to pass up

Well, I’m sure MMR is high, just don’t know how high lol
I did order air suspension, but that’s pretty much all. Don’t care about sunroof.

Which trim, i’ll pull it

Yeah but you need to spec it with it for resale

The 3 main credit unions I recommended, will all work with out of state borrowers. The credit unions I have listed under regional, are in-state only.

TLDR; It varies by CU

Thanks for all this info! Do you have a favorite full size truck that isn’t a TRX?

The raptor :rofl::rofl:

How do you get 69k out the door? Most I have seen 10k, 10-11% off

Mine was $68900 pre price change I think that’s not the case anymore.

Im definitely gonna have to do the Ballon loan for my Mach-E GT order but being in CA, with such high taxes, and no credit for trade-ins, makes balloon loans kinda unattractive compared to traditional leases

Wasnt yours a base? Calculator is for 91K+ MSRP.

How are you getting this for Mach-E? In Ford’s list, only shows Mustang.

And for the TRX, ur getting almost 20k off the the MSRP discount?

Yes was base with some minor add ons before price change.