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Lower instalments, lump sum at end with balloon financing

Published:Sunday | May 10, 2015 | 5:00 AMChad Bryan

Starting today, each week Automotives will be getting an expert explanation of a term related to automobile expenditure. We hope it will assist you in your quest for the automobile best suited to your needs at an optimal cost.

Balloon financing, which is offered by financial organisations such as the Stewart's Automotive Group's associate Simpson Finance Jamaica Limited, opens up an option for motor vehicle loan repayment.

Launched in November 2013, Simpson Finance is headed by its finance manager, Richard Coe.

Used in the United Kingdom and the United States for many years, balloon financing gives purchasers the option to make lower monthly payments than the traditional option. A lump sum is then due at the end of the loan period.

"The way in which a monthly payment can be lower than traditional financing is by taking a portion of the principal and deferring that principal until the end of the term of the loan," stated Coe.

"So the monthly payment is both interest and principal and, instead of paying the full portion of the principal element of the monthly payment, each month we take a portion out and defer those portions until the end of the term," Coe further clarified.

According to him, several customers have taken advantage of this payment option; however, customers are sometimes advised not to do so if they can finance their motor vehicle purchase without a balloon payment.

"It is for the customer to make that decision as to whether they would want the balloon option, because they want the lower monthly payments, " he said.

Coe said balloon financing applies to all brands sold by Stewart's and is being taken up across the range.

"It is all vehicles. There doesn't seem to be a preference as to which vehicle. You may have occasions where someone wants to purchase a more expensive vehicle, but traditional financing couldn't allow for it. With the balloon option, it's got them to a monthly payment they can afford so they do opt for the most expensive vehicle, which they can now afford," Coe pointed out.

Asked whether or not balloon financing is a better finance option, Coe said that depended on the customer.