Intro to Car Title Loans
Do you want to buy a new car? Besides cash payment, leasing, and car loans, balloon financing is another way to buy a new or used vehicle. This form of car purchase has the advantage of meager monthly rates, but there are also disadvantages. You can read what these are here. Take a few little minutes to read the following article to gain more information.
What is balloon financing?
Title loan financing is a particular type of car financing that is divided into three parts and can there are many options to find a deal with several car title loans entirely online. First, you make a down payment, which is not mandatory. Subsequently, an installment payment with low monthly installments is necessary over a fixed period. In the end, you have to pay a final installment that corresponds to the current residual value of the car. Since this final installment is very high in most cases, possibly more than 50% of the purchase price, it is called the balloon or balloon rate.
Another name for balloon financing is car loan with the final installment. There is also no difference between the terms of balloon financing and 3-way financing. Both have the same meaning.
How do car title loans work?
You can take out easy title loans for a car directly from a car dealer or independent bank. The best title loans are divided into three stages, as explained above:
- Down payment: optional
- Installment payment: small rate installments
- Final rate (balloon): residual value of the car
The bank estimates the residual value of the car. It is based on the expected wear based on the mileage you are likely to drive to the final rate.
Examples: The monthly and final title loans financing rates are as follows
In one case, you buy a new car worth €35,000 (Auto A) and want to obtain balloon financing for this car. The final installment should be € 18,000, which corresponds to the assumed residual value in 4 years. In the second case (Auto B), you buy a much cheaper car for 12,000 € with a final rate of 5,000 €. The consumer can waive in each instance on a pre-payment.
Two examples of a car loan with title fee
Auto A Auto B
Purchase price 35.000 € 12.000 €
Residual value after 4 years 18.000 € 5.000 €
Necessary financing 17.000 € 7.000 €
Interest rate 4 % 4 %
Monthly credit rates 383 € 158 €
Car title loans rate 18.000 € 5.000 €
With Auto A, you pay monthly credit installments of €383 for four years and a final installment of €18,000. For example, Auto B has monthly rates of €158 and a balloon rate of €5,000. In the case of Auto B, the advantage of the low monthly rates is particularly apparent.
What happens if I cannot pay the high final auto title loans installment of the car loan?
It is not a problem, because you are not obliged to pay the final installment in one sum. After the installment payment phase, you have the free choice of three ways to spend the residual value of the car/ motorcycle.
Option 1: You pay the residual value as a final title loan installment, and the car belongs to you.
Variant 2: You do not pay the final installment and do without the car in times of cash need (with balloon financing, you can also return the vehicle).
Option 3: You continue to pay off the car with new financing.
It gives you three options on how to handle your car.
Title loan financing: What advantages does the credit option with the best title loans offer over an installment loan?
The advantage of car title loan financing for new and used cars becomes apparent when you compare the monthly installments with those of a traditional installment loan. If you were to finance the purchase price for Auto A, i.e., € 35,000, entirely via an installment credit, you would have to pay monthly installments of € 789 in the four years of the credit period. Within the scope of balloon financing, in the above example, the figure is only €383.
Installment loan or secured loan financing: comparison of the loan installment amount</h2
Classic installment credit Title loan financing
Monthly installments for 4 years 789 € 383 €
Final rate 0 € 18.000 €
It is easy to see that the most significant advantage lies in the moderate monthly rates at the beginning of the financing. A big disadvantage also becomes clear: the high final installment at the end, which you have to save up, whether with a dealership or car title loans completely online. It means that you have to build up reserves over several years in the amount of the final installment. Of course, it is something else if you expect a more significant amount of money, for example, if a savings contract expires. In this case, you do not have to save separately for the final installment.
A car motorcycle title loan allows you to drive a car for the duration of the installments and return it without further obligation when the final installment is due. Due to the relatively low monthly rates, you can also drive an expensive car during this period, which you might not have been able to afford a car loan with its high standards.
Special features of balloon financing: the risk of loss in value
However, auto title loan financing also entails a risk that should not be underestimated. In the worst case, in addition to the final installment, you will have to compensate for a loss in value. For example, if the value is reduced due to damage to the car. It is the case, for example:
- A wacky rear-view mirror
- Scratches in the lacquer
- Bumps in the mudguard
- A burn hole in the seat
If serious defects come together, the damage can amount to several thousand euros. You must pay this amount in addition to the balloon rate if you return the car to the dealer. And you alone bear the risk if the car loses value after an accident. You still have to pay the agreed final installment.
Is the balloon loan cheaper or more expensive than a car loan, and are there online title loans?
A disadvantage of balloon financing is that it can be more expensive than a traditional car loan. It happens when you absolutely want to buy the car in full but cannot pay the final installment and therefore take out a new loan. You may then have to pay high-interest rates — namely if market interest rates have risen in the meantime. It drives up the total price of the car.
For example, if you take out a car loan of more than €35,000, you will incur interest costs of €2,871 with 4% interest and a term of 4 years. If you use a balloon financing and first take out a loan of 17,000 € and for the final installment of 18,000 € take out another, which bears interest at 6%, then you pay 374 € more.
There are several offers of online title loans, which you can get plenty of information about on the internet.
Other reasons why automobile title loans can be more expensive than a car loan
- It can happen if you have to pay compensation for loss of value for damage to the vehicle.
- Another point that pushes up the cost of balloon financing is the number of kilometers driven. If you drive more kilometers than you suspected at the start of the contract, you will have to pay extra per kilometers.
Under these conditions, title loan financing is cheaper than a car loan.
- For example, if you do not cause any damage to the car during the term of the loan. Then you can return the vehicle before the due date of the final installment and have saved money through the favorable monthly installments.
- You can drive well with a balloon loan if you can pay the final installment in one piece, and in this case, you also benefit from the relatively low monthly installments.
In any case, we recommend that you obtain and calculate several offers, both for a car loan and a balloon loan. Take your time to compare the terms and conditions of the providers. Read the small print carefully, for example, on how to deal with signs of use or damage to the car.
For whom is a title loan suitable?
A title secured loan may be suitable for you under certain conditions.
- If you can only pay the lowest possible installments for the new car, this means that car balloon financing can be useful for self-employed people who have only a small or irregular income.
- If you only want to decide shortly before the due date of the final installment, whether you wish to buy the car definitively or return it.
- If you consider yourself a prudent and safe driver and assume that you will remain accident-free during the installment payment period, or even if you only drive a few kilometers in that period, it reduces the risk of depreciation due to damage.
- If you want to drive a new car at favorable monthly rates for the period of the installment payments and perhaps want to drive a new car regularly every few years.
- If you are sure, you can pay the high final installment. It may be the case if you know that when the title loan rate falls due, the corresponding amount will be received from an endowment policy or a savings plan, for example.
There are arguments in favor of a balloon loan, but there are also arguments against it. With the following list, you have all the advantages and disadvantages at a glance.
Advantages of balloon financing
- A down payment is voluntary
- Low rates for the lender
- Car purchase possible with small starting capital
- The relatively short term of the loan
- A new car every few years with the best title loans (if you return the vehicle)
- Many online title loans available
- Can cash during the installment be subjoined? – Yes, also a great advantage of specific loan models
Disadvantages of title car loans financing
- High final installment
- Reserves must be formed for the final payment
- In the case of follow-up financing, you may have to pay higher interest rates, which may make balloon financing more expensive than a car loan or installment loan
- The risk of rapid depreciation of the car lies with the buyer
- You have to pay for damages to the car
Tip for the End for better title Loans Choices
When concluding the title loan financing, make sure you estimate the expected mileage as accurately as possible, which is possible online, just like car title loans. If you give too few kilometers and drive more, you will have to pay extra. It can mean a few hundred euros. If you enter too many kilometers and drive less, you spend too high credit rates, which are also calculated based on the expected mileage.