How does VWFS’s balloon financing benefit car buyers vis-à-vis EMIs?
When you take a car loan, it’s often in the form of EMIs - Equated Monthly Instalments. In bankers’ language, EMIs are a form of amortization – in which the value of the loan comes down with each repayment. In other words, each EMI is made of an interest component and a principal component. Most loan schemes have a high interest component at the start, but towards the end, the principal becomes higher in proportion.
In balloon financing, the principal is not spread out over time, but a large chunk of it remains payable at the end of the term. This is the ‘balloon’. This means that the interest component of the EMI remains high. In practice, balloon financing keeps the overall EMI lower over the period of the loan.
So how can balloon finance have more advantages compared to regular EMIs?
Here’s how. EMIs are intuitive – as your principal decreases every month, so does the interest, and at the end of the tenure, you have nothing to pay. However, when it is a car in question, the value of the car also goes down each month due to depreciation. By the end of tenure, you are paying more than the current worth of the car.
On the other hand, in balloon finance, you pay a lower EMI, on the condition that you have to make a lumpsum payment at the end of the tenure. However, Volkswagen Financial Services also offer you an Assured Buyback Value. This means you return the car for a fixed sum of money, which significantly lowers (and may even eliminate) the final lumpsum payment.
Volkswagen Financial Services also offers you attractive options at the end of tenure:
1. You could actually pay the balloon principal and retain the car
2. You can sell the car back to VWFS at the Assured Buyback Value
3. You can exchange the car for another one from the Volkswagen stable
4. You can choose to extend the tenure of the loan
Depending on the make of the car, you may get some or all of the options above from Volkswagen Financial Services. Should I go for balloon finance? Smartly played, the balloon finance route can save you a pile.
At VWFS, we recommend balloon finance if you want to pay a low EMI and down payment and aim to upgrade your Volkswagen, Audi or Skoda vehicle at the end of the loan tenure.
While you pay lower EMIs, you can use the savings for other domestic needs. You can also invest the money saved on EMIs, which opens up another world of opportunities.
With VWFS Balloon Financing, at the end of the loan tenure, your EMI will be approximately 30% lower than that of a standard loan. Also, the residual value of the car
when your term ends will be higher than or equal to the balloon amount.
But do remember there is that final payment to save up for. If you consider refinance at the end of tenure, you’ll need to make sure that you have good credit history. Talk to your VWFS financial advisor to chalk out the best plan that fits your income and loan appetite. At all points, do remember to read the terms and conditions very carefully, and ask your advisor to explain them to you if necessary.