I recently learned about the BMW Select program, this is a balloon financing option through BMW. I am working through a dealer who has a new M3 and they offered this as an option to leasing since the payments were $200-250 cheaper. The M3 is a car that won’t depreciate at the same rate as a normal BMW, which offsets some of the risk. However, I’ve never used balloon financing before and not sure how I feel about this? I like the idea of owning the car and no mileage limits/penalties, but there’s that still that risk, but I guess worst case you can refinance the balance like any used car. There are people online who have used this in the past/present on their M-cars and have been very happy. Some have even said they’ll park the ballon amount in a separate investment account upfront and earn money off it as an insurance against the ballon, and if they decide to keep the car they pay it off in cash. I have 401k’s, IRA, emergency fund, etc but don’t have $50k extra cash to just pull & park for 3 years towards a car.
What are your expert opinions on this option? Please educate me on the pros and cons, thanks.
Yes but a lease you turn in the car if you are underwater or your sell it if you have equity.
I am assuming you say save $200 you are talking about lease vs balloon
I understand the benefits of leasing and have been leasing for a number of years now. Im wanting to know the ins and outs & opinions on this type of financing product.
Yes, the lease was around $1160/mo, and this option is around $875/mo, so really closer to $300/mo or $10.8k over 3 years. The car is through a broker on the east coast and their rate is 0.9%, but the rate in MI is coming up at 3.9%. They were checking to see what they could do about the rate.
Maybe I should look at SaL before making any decisions?
Worse is a situation like 2009 when lots of people lost jobs suddenly and even those who kept theirs couldn’t get approved under suddenly much tighter lending criteria.
Those sorts of situations also tend to coincide with your other borrowing options drying up, e.g. home equity becoming illiquid, stock portfolio trading at their lows, etc etc.
Good point. If we enter a recession, lending dries up, and there’s a job loss there a lot bigger problems to worry about, or at least many additional problems. In that case, the worst case is draining of emergency funds, having to pull from 401k with penalties, or in the absolute worst case the dreaded B-word.
I believe in the case of leasing worst case is turn the car in and buy a cheap car to get buy until things turn around.
Is an M car really worth draining emergency funds, pulling from your 401k or a possible bankruptcy? In other words, is that badge worth possible financial ruin, or a lessened financial security in retirement should things get ugly? Then you’re stuck with an expensive German liability when the miles start getting high. What are you going to do when the warranty dries up and you’re possibly stuck with a monster repair bill that you can’t cover because you drained your 401k to float the balloon?
Maybe you feel different, but I don’t think it is.
I’m somewhat familiar with BMW’s Owner’s choice program, which is also a balloon finance option. I’m almost positive I remember there being some sort of gotcha though at the end of the balloon insofar as it’s not as easy as it is in a lease to just walk away if you’re underwater, but could be mistaken as well. No idea with regard to BMW select though.
To answer your question, is an M-car (or any car) worth financial ruin? No. I see what you’re saying and it makes a lot of sense. Even if we were to see losses like we did in 2009, there would still be multiple times the buy-out of the car in 401ks alone, but your point is one that I need to consider.
Even with a lease if you were to become unable to make the payments your still on the hook for the remainder of the payments.
So are you saying you’d suck up the extra monthly for the peace of mind/insurance against additional financial loss? Or just finance it and plan to own at the end or have equity built up?
Which would unlikely qualify for a 401k loan, so you’d have to liquidate and pay ordinary income tax and penalties on withdrawal.
I realize the last 18 months of “used cars aren’t depreciating assets” feels like it can’t end, but it’s an aberration. Will an M car hold its value better than most? Maybe. Do you want to own 100% of that downside risk?
I’d never finance a German car unless I planned on driving it right into the ground. They might be worth something today, but that used car market is eventually going to cool off.
Massive nerd and former broker so I’ll try and assist as well. Select is a traditional balloon loan, lower payments and a payment due at end. Trade car to cover that payment, delta is your equity, negative or positive.
Owners choice is a balloon loan with walk away option, so you have the option to walk away and pay a disposition fee, this is only available in a few states. As is the benefit with owning a car, you are titling the car in your name, owe full sales tax, and qualify for all rebates (federal, local ev, etc).
Now @IAC and @wam22 can fact check me, but lease and Owners choice rebates are usually in line, and I think they share residuals, but as a PA/North east based broker, no dealer offers this (select is actually illegal in IL, NC, ND, NH, NV, PA, TX and WV). Never written either loan, so I can’t go further but this is the knowledge that I have.
How much is the balloon payment? Is it a closed-ended or open-ended lease?
I can’t imagine a financial world in which making a balloon payment on a depreciating asset would ever make sense.
Spot on. No acqusition or disoposition fee with a balloon. Usually the APR is .5% to 1% higher than the money factor to make up for the acq and dispo fees. There are no extensions and your last payment is due on turn on (first payment is made 30 days after signing). Also no GAP. Otherwise, similar to a lease in that there is a turn in date, wear and tear, etc. No gotchas at the end.
I never sold anyone a “BMW Select”, but it is pretty much an open ended lease where you are on the hook for the car’s value at the end. Either refinance or pay cash for the balloon amount or sell it. But any negative equity is your responsbility and if you are too negative, a bank might not refinance without a down payment. On the flip side, you can have some equity and is a way to “lease” for less. Select to me was always a way for someone to learn a hard lesson about car buying.
Owners choice only makes sense in situations where taxes make a lease more expensive, such as Chicago. I only advocate a ballon to Chicago residents or to those Illinois residents that have a high-value trade in where the taxes with the trade-in credit can go to $0 or less than a lease. No gotchas, but it is not a benefifical program for 99% of buyers compared to traditional leasing.
Please expand on this, as I’m not exactly sure what you’re saying. Is it that you will end up upside down, and after that happens once you won’t get “burned” again?
How about this, You balloon loan a 100k car, the balloon is 60k at the end. The car is worth 50k, you have to make up the 10k just to get a loan. You have as you agreed to buy the car.
You lease a 100k car, the lease is 60k at the end, the car is worth 50k, you turn it in and walk away.
In either situation (loan or lease) if the car is worth 70k, you can sell it and make 10k.
