Home > Auto Loans > Balloon Auto Loans: Alternative To Leasing
Balloon Auto Loans: Alternative To Leasing |
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Credit unions normally offer auto leasing but there is a simpler and less expensive option which does not need a separate accounting system, tax reporting, insurance tracking and third-party assistance. This option is known as balloon auto loans and it can be administered till the end, similar to a regular, fully amortized installment loan.
It is only at the end that some expertise would be needed from a third party. Some members of the credit union might prefer balloon auto loans as they may prefer low monthly payments and might not be able to afford insurance requirements of standard leases. The salient features of balloon auto loans, which are also known as payment saver loans, include 30% less payment than a conventional amortized loan, no down payment or security deposit, a higher mileage allowance at 18,000 miles per year, facility to sell or trade in the car and pay off the loan balance at the end of the loan and the option to keep the car and refinance the amount owed or to return the car to the lender in lieu of the balance. Before deciding upon the type (whether direct or indirect) of balloon auto loans, you should find the answers to some pertinent questions such as: Have other members of the credit union used balloon auto loans or leases in the past and are members willing to pay a higher rate for the advantages of a balloon loan? Do you plan to offer the assured value of the vehicle, which is the guaranteed value of the vehicle when the loan has been paid up? If the market value of the vehicle falls short of the assured value, the credit union or its third party servicer provides proper residual value insurance cover. Is there any plan for end-of-term administration? If you do not have insurance to cover excess wear-and-tear and mileage charges, you must sell the vehicle at the end of the term and collect these charges. How well can you market the program? You should find out how successful your credit union has been at selling other products and what other marketing resources are available. Are administrative costs covered in your pricing model? There are additional marketing and end-of-term costs for balloon auto loans programs. For indirect balloon loans you should answer these questions: do your dealers need this product? You will have to make the rate competitive, include excess wear-and-tear coverage, and provide an end-of-term program so that members can return vehicles easily and convince them that the customers will want the product. Will the product be able to compete with lease and other balloon auto loans programs? By following industry guidebooks and purchasing full coverage residual insurance, credit unions can easily give competitive rates due to their lower cost of funds. Do you have a plan for end-of-term responsibilities? You must have an end-of-term plan as in the case of a direct balloon auto loans program. What are the state laws for end of the term? Your cost of funds might increase in some states where you have to refinance your loan at the original interest rate. Is your residual value risk sufficiently insured? To adequately add to your reserves and factor losses into your pricing model, you should know the terms of your or your third party servicer's insurance policy. Insurers, industry publications, consultants, other credit unions and your own experience with selling repossessed vehicles constitute the sources of advice in this area. What other insurance services should you include? Credit life and disability, unemployment, other covers with excess wear-and-tear insurance need to be bundled to make your product more competitive. Convincing the dealer and offering a commission if you make the covers optional will be beneficial. You will need to conduct a feasibility study, plan, identify accounting and data processing changes, develop forms and documentation, determine compliance and insurance requirements, and adjust administrative operations for developing either type of program. Balloon Auto Loans are an alternate to leasing. You can finance a new or used vehicle with no down payment and monthly payments can be lower for a two to five year term. You can refinance or pay off the loan at the end of the term. |
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