In finance and credit, there are concepts that at first glance do not seem so completely understandable. One of these terms is certainly the word “balloon financing”. So, if the question arises as to what balloon funding really is, where are you used and what should you look for in this form of credit? Questions that we would like to answer with this article. First and foremost, so-called balloon financing is probably more familiar to most people among us than the term “credit with final installment”. A form of credit that is used in a high percentage of a car loan, but is also increasingly used in high-priced consumer goods.
Characteristics of a loan with closing rate
In the case of a loan with a final installment, a loan amount corresponding to the normal installment loan is agreed between the borrower and the lender. The big difference to a conventional installment loan, however, is that the loan amount is not divided as usual over the entire term, but is included only in a previously agreed share in the term financing. As a result, at the end of the life of the loan, the borrower has the obligation to return the remainder of the loan to the lender in one go.
Plain: The difference between completed installments and the total financing will be redeemed at the last installment, the so-called closing rate, at the end of the repayment term.
Benefits of a credit closing rate
The most obvious advantage of such a loan lies in the possibility to keep the rates for this loan quite low and thus to superficially reduce your own monthly financial burden. Ostensibly because, the lower the monthly installments, the higher the final installment. Thus, at low monthly installments, it must be ensured that the borrower at the end of the term will then be financially able to settle the then agreed, high final installment.
Another advantage is that the interest rate is also effectively reduced, as it is credited only to the previously paid installments, but not to the final installment of the loan.
Typical application of a loan with closing rate
In the banking sector, a credit with a final installment is a common financing model, but this is mainly used when the loan has a trackable investment. From the point of view of the bank, this has, above all, security reasons that should ensure that, as already mentioned, the loan or the last installment can also be completely repaid. Therefore, a loan with a final installment usually requires that the bank has an attachable item, for example a car, in the event of an emergency, which can be called in the event of default. Since the final installment is much higher than the previous monthly installments, lenders want to hedge so that the loan can still be fully repaid.
If you are sure that with a credit with a final rate your own financial options can also raise a higher final installment, or you put in wise foresight already money back for this rate, you can save considerably in the interest incurred. Therefore, a loan with a final installment is usually only allowed if there is a firm and ideally long-term employment relationship, so that the lender does not have to fear a sudden termination and thus a payment default.