The final installment financing (balloon financing) serves to finance a final installment agreed with the purchase of a car. Balloon financing creates the possibility that car financing can be arranged at rather low rates. The reason for this is that in the first few years, only a small part of the vehicle is paid off with the financing. However, the remainder is then a large part of the total value and is payable at the end of the contract as a so-called final installment. If, for example, a car costs 20,000 euros, the final installment financing of 3 years can be used to finance 10,000 euros. If the 3-year term has expired, the outstanding final installment of 10,000 euros must be paid to the appropriate lender. Although this form of financing a car is cheap at first glance, the interest rates are very high. Should the borrower be unable to finance the final installment, the vehicle will return to the dealer. With a final installment financing, however, the borrower also has the option of making another loan from the final installment, which then has to be repaid in monthly installments. However, this balloon financing also has disadvantages for the borrower, as the final installment will lead him to repay debt through the loan for financing the final installment. In addition, this form of financing is paid more interest than a traditional loan, although the advantage is that the monthly burden is quite low. The borrower basically has to make some reserves through the final installment, despite the low rates, if he wants to pay the final installment with an amount. This basically increases the load again. For a lender, of course, this is a significant advantage of the final installment financing, as it can offer the customer a new loan and achieve further profits. The borrower will not be able to benefit from the low interest rates by the exception of a new loan. Furthermore, it is a disadvantage, because it then takes another few years, until the vehicle passes into the actual possession of the borrower.
A final installment financing (balloon financing) should only be considered if one is able to settle the final installment with an amount without any problems, otherwise the borrower will not benefit greatly.