What is Balloon Finance?
Balloon Finance Tesla
To begin with what is Balloon Finance? This is also known as a balloon payment car loan or a balloon payment car finance. This is a type of car financing arrangement where the borrower pays lower monthly installments throughout the loan term. Then the buyer pays a large “balloon” payment due at the end.
This balloon payment typically covers the remaining principal balance of the loan.
Here’s how it generally works:
- Loan Structure: The borrower takes out a loan for the purchase of a car. Instead of repaying the entire principal along with interest over the loan term. Then a portion of the principal is deferred to the end of the loan term.
- Lower Monthly Payments: Since the borrower is not paying off the entire loan balance over the loan term, monthly payments are lower compared to a traditional auto loan.
- Balloon Payment: At the end of the loan term, the borrower must make a large lump-sum payment. This is known as the balloon payment, to satisfy the remaining principal balance of the loan.
Why are lenders pulling Balloon Finance on Teslas?
This is due to the expected value on these vehicles in 5 years time being uncertain. The market for non EV vehicles has been consistent for many years and so residual balances are known. As we enter a new world of electric vehicles no one knows how they will last or what the resale values will be in 5 years or more.
Understanding depreciation is essential for buyers of vehicles on finance. It impacts the vehicle’s resale or trade-in value – this is the key reason why EV vehicles are being pulled from Balloon Finance agreements.
Some vehicles depreciate more rapidly than others and this is being seen in the EV market. It’s essential to research and consider depreciation rates when purchasing a vehicle,
Tesla Finance – Case Study (Feb 2024)
We was asked this week to obtain a finance quote on a brand new Tesla Model 3 – with a value of around £53,000 new.
After a conversation with our main car finance lender the only option we could provide to our Client was a Hire Purchase agreement. This would cost around £1,000 per month for 60 months with a moderate 10% deposit.
We wasn’t able to get any quotes for a Lease Purchase agreement as the lender couldn’t put a price on a Tesla in 5 years time. This is very worrying for the EV market – especially those who have already purchased a Tesla.
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