Better Than a Lease? A Balloon Loan Primer

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.

Why Consider A Balloon Loan

A balloon loan combines features of a lease, such as low payments based on a residual value, with features of a loan, such as direct ownership. This type of financing is now gaining popularity with captive lenders, who may call them “Select” or “Option” programs, and offer them alongside more traditional lease and conventional financing options. However, these programs terms are generally favorable to the lienholder, and while the concept is valid, better programs can be found in the open market.

Here we focus on the concept of a non-captive or indirect balloon loan, most commonly funded by a credit union. The flexibility of these third-party programs are generally applied one of two ways. The first approach combines a short term with a large down payment, so the loan balance is very close to the RV. The resulting payments are small, as only the debt service is being paid. The second approach combines a long term with no down payment. The resulting payments are small, as the balance due is spread over the long repayment period.

Other benefits of a balloon loan include the ability to recover positive equity at the end of the payment term, which is especially important in today’s market where vehicles regularly outperform residual value. A balloon loan is considered a cash purchase, so it captures manufacturer rebates which may only be available to such a purchase. In many states, you can transfer plates and registration, which can result in a nice savings.

Combining one of recommended approaches with some or all of the additional benefits can result in a very competitive total cost of ownership, even when compared to the lowest rate long term conventional financing available. In the end, for those who are looking to maximize monthly cash flow, above all else, a non-captive balloon loan can be a good option.

What Is the Downside of Using a Balloon Loan…

Yes, a balloon loan carries risk. That risk results from the sum of the payments not bringing the loan balance to zero and a final balloon payment due to cover the difference. The borrower must therefore execute on the most beneficial disposition option; buy, sell or refinance. As compared to a lease, where you can return the vehicle, or with a loan, where you will own the vehicle free and clear, a balloon loan can leave you upside down.

Other downsides of a balloon loan include, in most states, you will need to pay full sales tax upfront, so no tax advantages, like a lease. Balloon loans generally do not residualize options very well. The best build for most vehicle is a base trim level. The interest rate is usually one point higher versus conventional financing. For high end vehicles over $70K, there can be an additional origination fee.

In some cases, a rider to a balloon loan can be included to create a vehicle return option. Including this rider increases the complexity of the balloon loan analysis, and for the purposes of this article, we are excluding the consideration of this optional rider.

The Right Conditions for a Balloon Loan…

Once you have decided that the risk and rewards of a balloon align with your personal financial strategy, the next step is to assess if your target vehicle is a good candidate. Not every vehicle will have a competitive program, so some research will be necessary to compare payments and total cost of ownerships across financing options. Generally, cases where a balloon loan program work well:

  • Short term ownership is desired. Balloon loans are NOT for vehicles you will hold forever.
  • Where a vehicle hold resale value very well, and can return positive equity at term end.
  • Where one finds a favorable program MRM/RV for a vehicle from a lender.
  • Where a long term, low rate, 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.

Where can I get a balloon loan…

The most common institutional lender offering balloon loan programs is Auto Financial Group (AFG), and they do not offer the program direct to the public. Instead, the program is offered via affiliated credit unions. Thus, most credit unions who advertises a balloon loan offering are reselling the same AFG program. Some credit unions may call these programs something like “better then a lease” or “payment saver” and may charge different rates and/or fees – but they are all fundamentally the same The below list provides suggested credit union offering this program.

  • AmeriCU Credit Union (https://americu.org/) Paysaver auto loan product offered at low rates and across various terms. A one-time donation to the American Consumer Council permits membership. You can join and apply online, but I recommend pro-actively calling a branch and working directly with a loan officer. Uses experian for credit checks. Can take longer to close.

  • CapEd Credit Union (https://capedcu.com/) Payment saver auto loan product offered at moderate rates and across various terms. A one-time donation to the CapEd Foundation permits membership. You can join and apply online, you will be assigned a loan officer who will follow-up over the phone. Uses transunion credit checks. Can close quickly.

  • Hanscom Federal Credit Union (https://hfcu.org/) Better then a lease auto loan product offered at higher rates and few terms. A one-time donation to the Nashua River Watershed Association permit membership. You can join and apply online, you will be assigned a loan offer who will follow-up over the phoner. Uses transunion credit for score. Can close quickly.

Another institutional vendor, CULA, is also gaining popularity as another option for indirect leasing through partner credit unions. However, it appears that these programs are only accessible to dealers and not the general public. These means to access these programs you must use a dealer from the network.

How Do I Use A Balloon Loan Calculator…

  • AFG Default Payment Calculator AmeriCu Calculator Use this calculator first, to determine the loan balance, rate and payment for your preferred term. Here is what a calculator looks like setup for a Ford Mach-E purchase in NJ. Note that the lowest mileage option has been selected, since we will not be returning the vehicle.

  • Balloon Loan Reverse Calculator Balloon Payment Loan Calculator |- MyCalculators.com Use this calculator second, take the data from the previous calculator and solve for the final balloon payment. Given the 24mo payment from the AFG calculator, we can solve for the final balloon payment…

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Acronym’s & Terminology used in this wiki

MRM / CRV - This is the value of the vehicle assigned by AFG. It is based on the “Maximum Residualized MSRP”, which consists of the MSRP of the typically equipped vehicle and value adding options giving only partial credit or no credit for those options that ALG understands add little or no value to the resale price of the vehicle.

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 - The amount of the loan
Conventional Rate - The rate commonly offered on traditional finance.
Balloon Rate - The rate offered with the balloon product.
Annual Mileage - Mileage affects the residual value of the vehicle.
Residual Value - The forecast value of the vehicle at the end of the 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.

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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.