What does "balloon payment" mean?

What does "balloon payment" mean?

James Bell (Publisher, Auto Reviewer) gives expert video advice on: What does "balloon payment" mean?; What does "base value" mean"?; What does "buy here, pay here" financing mean? and more...

With regards to financing your car, a balloon payment is a way that finance companies have helped get a lower monthly payment. Quite often people buy a vehicle and they're mostly concerned with keeping it under $40 or $50 a month. If they're financing it and their approved interest and term of the loan won't allow for that, they'll sometime slide some of the amount you owe into a balloon payment at the very end of the term. So, if you're paying $40 a month for 35 months and then month 36 comes, you have to pay $20. While that can seem like a good financial advantage as you're able to keep more money in your own bank account, potentially making interest on it, it's often dangerous because people will often live right to that line and not have that additional money set aside for that balloon payment. While the balloon payment structure does allow for a lower monthly payment, most people are not savvy enough or not smart enough to make sure that they're also budgeting for the big balloon payment at the end. Therefore this balloon payment at the end can cause a problem and potentially put you in a deeper debt situation.