Leasing: Balloon Payments
When you lease an automobile versus purchasing with an auto loan, you have the right to the vehicle for a set period of time (typically 36 months), and when it’s over you can turn in the car. After resolving the lease turn in costs with the lease manager, you’ll be able to walk away with no further involvement needed.
Balloon Payment Basics
Before the turn in process however, you have to make payment arrangements, including whether or not your lease contract will be subject to balloon payments.
A balloon payment is the final payment on a contract that is significantly larger than the other payments that were being made. The laws for balloon payments on leased vehicles prevents the payment amount from being larger than a total of three times your regular payments. However, that is not automatically stated in the contract, and you need to negotiate that clause or at least double check that it is present in your paperwork. It is possible that you might be able to pay more than the original balloon payment amount you agreed to in the original contract, but you will have to know the details of your agreement to be sure. A balloon payment is unique and separate from other traditional lease-end charges.
Make a Decision on Balloon Payments While Negotiating the Contract
Once you lock in the terms of a contract, nothing further can be negotiated. Residual value figures (the predetermined estimate of what your car will be worth upon its return) are not negotiable near the end. You will have the most power while negotiating the terms of your car lease, so if you can avoid a balloon payment, try to do so. Typically, the advantages of balloon payments are that you are able to make a smaller down payment, and initial payments will be smaller leading to the final balloon payment. This means that savvy investors are able to use the extra liquidity upfront to make wise investment decisions that will yield extra profits as opposed to being applied to a loan.