There are many different and confusing terms involved in car finance. One of these terms that you need to know is balloon refinance. Now, you might have heard of a balloon payment for a car, which is a payment method in which you opt for a residual of a certain percent, such as 20 percent, and will repay this lump sum once the loan period is over. It helps to lower your monthly instalment for the duration of your car loan but you will need to repay this amount at the end of it.
You can look into balloon refinance if you cannot pay this amount back. There are different options available, such as repaying the balloon payment with monthly repayments or trading in your car in order to use this amount for the outstanding balloon repayment. When payment is due, it is vital that you look into all available options so that you do not remain in debt. Discussed below are some reasons why you should apply for balloon refinance and how you go about it.
Why should you apply for balloon refinance?
If you have taken out a balloon payment option for your car, you understand that you will need to repay this amount at the end of your loan. For those who might not have been able to save enough money over the period of their loan, this can be difficult as you will not have enough money which could lead to issues with the bank.
Your loan term might end and you find that you have not saved enough money to repay the balloon payment. And this can be highly stressful so you will need to find a solution which can alleviate the situation. Balloon refinance can be the ideal option, allowing you to repay the bank and remain debt free for as long as possible.
How to apply for balloon refinance
Know your credit score
Knowing your credit score will help you immensely when applying for balloon refinance. If over the period of having the car loan, your credit score or rating has dropped, you will need to be able to explain this to your bank. And you can only do this if you know the score yourself.
You will also be able to work towards improving your credit score, which will show the lender that you are taking the issue seriously, making you a lower risk client. It is important to know your credit score when looking at balloon refinance because one of the repayment methods is considered to be a new loan, as you will be repaying the loan with monthly instalments, similar to those of a normal loan.
Gather the right documents
Your lender will likely have all of your information on file already, but it is always a good idea to be prepared and have the relevant documents ready in case they are needed. You will need to provide the following documents:
- A copy of your up-to-date identity document or card
- A copy of a valid and up-to-date driver’s license
- Proof of address, such as utility bills, not older than three months
- Three months of bank statements, or a recent payslip
These documents are needed in order to verify that you are applying for the refinance and there is no fraudulent activity taking place on your bank account. Be sure to keep your details updated, especially if you have recently changed address, gotten married or divorced as your bank needs to be notified about any change of details.
Decide on the type of refinance you need
You can choose from different options for balloon refinancing. Each one is designed to meet the needs of the individual clients of the lender, so you are sure to find one to suit your needs. The different types of refinancing are outlined below.
- Monthly repayments: Repaying your balloon payment using monthly instalments is ideal if you cannot afford to pay a lump sum upfront. This does mean that you will enter into a new finance agreement with your loan provider, and can choose to repay this loan over 12, 24, 36 or 48 months depending on your financial situation.
- Once-off payment: A once-off payment is one of the more popular methods of repaying a balloon payment. What this means is that you will make one lump sum repayment when the loan term is over. This will ensure that you are no longer experiencing debt and have paid off everything in full.
- Vehicle trade-in: You can arrange with your lender that the amount of your balloon payment is covered by the trade-in value of your car. If this amount does not cover the balloon payment value, you can apply for refinancing or settle the difference in full. Trading in your vehicle can be tricky, so be sure to ask your lender for advice on when the best time would be to do this.