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The balloon route to your luxury car

The balloon route to your luxury car

This type of loan certainly has its risks, but if you’re willing to accept them, it could be the fastest and cheapest way to your dream ride. Conditions, of course, apply.

Perhaps you’ve seen an ad that promises you a Jaguar or an Audi for a paltry equated monthly installment (EMIs) of say, Rs30,000. You were probably left wondering how long you’d be paying the EMIs for. Well, what if it was a seven-year loan? Sounds impossible, but it’s true. There’s a big catch, of course. It’s that at some point in the future (up to three years later, with Jaguar), you’ll have to pay up to 50% of the loan amount in a single payment. Shocking, but it can be made to work through a simply trick – sell the car before the payment arrives. Let’s first understand the basics, though.

What is a balloon loan?
A balloon loan basically defers a major chunk (up to 50%) of your loan amount over to a later date. This effectively reduces your EMI. So, for example, if you take a loan of Rs30 lakh, your EMIs will be calculated only on Rs15 lakh, not the full loan amount. The outstanding Rs15 lakh will have to be paid anywhere from two to five years later (along with interest). This effectively reduces your EMIs during initial years, letting you drive around a luxury car, while paying the same EMI as someone driving, let’s say, a Toyota Fortuner or a Hyundai Sonata.

Who is offering?
Currently, all the major luxury carmakers are offering it, including Audi, Mercedes, Jaguar, Porsche and BMW, as well as a few financiers, such as Kotak Mahindra and Tata Capital.

Is it for you?
This type of loan doesn’t lower the cost of your car. If anything, it increases it as you’re still liable to pay interest on the balloon amount one way or another. The big advantage of the scheme, however, is that your investment is never large. You get a car loan for, let’s say, 84 months and agree to pay 50% of the loan amount (the bullet installment) after three years or in the last installment. The trick then lies in selling off the car or returning it to the manufacturer before this bullet installment is due. So long as the car is in good condition, the trade-in value should be sufficient to cover the outstanding balloon payment.

Dangers of balloon loans
1. Don’t think you’re paying any less for the car. Whatever you gain from the lower EMIs in initial years will be lost when you ultimately pay the balloon installment through the sale proceeds.
2. If your car is damaged, it won’t fetch the high price you expect it to. You will, therefore, be liable to clear the difference.
3. If you aren’t able to repay the loan in time, you would be hurting your credit score severely.

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