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Balloon Payments and Residual Values

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Knowledge is power when it comes to your next car

In August, The Wall Street Journal reported that consumer demand for new vehicles was increasing. The report noted that Toyota had a 60 percent increase in sales, Honda a 49 percent increase and General Motors a 16 percent increase.

Not only do consumers have their choice of vehicle manufacturer, make and model when they buy a car, they also have their choice of financing method. They can select the traditional auto loan or a lease, or they can try balloon note financing.

Balloon Note Financing Versus Leasing with a Balloon Payment

When a car is leased and has a balloon, or "residual value," payment at the end of the lease, the lessee must make that payment in order to keep the vehicle. During the term of the lease, the title remains under the dealer's name.

Under a balloon note financing arrangement, the title is registered in the buyer's name and sales taxes may be due up front. In some cases, at the end of the term, a buyer with balloon note financing can decide whether he or she wants to keep the vehicle and pay the balloon note or not—but according to the New York State Trial Lawyers Association, walking away could end up creating a fee that must be paid. Because all agreements are not created equal, it's important to familiarize yourself with yours before assuming that you have the option to walk away free and clear.

The key to assessing a balloon note's or lease balloon payment's financial benefit to you is first to determine the vehicle's residual value at the time of the balloon payment. Residual value is the ultimate value of an asset after depreciation. In the case of a vehicle, if your balloon note is less than the residual value at the time it's due, this could make it worth paying.

Consumer advocacy groups warn that many consumers are unprepared for the balloon note due at the end of the loan or lease term, but savvy buyers have the ability to save the money that they would normally pay per month if they hadn't chosen the balloon payment. They can then allow this money to collect interest over the term of the loan and use it to make the balloon payment.

If you need more information about leases, balloon note financing and determining the residual value of your vehicle, stop by or give us a call.

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