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Balloon credit: Is it convenient to buy a new car?

Laura Sandoval wants a hybrid SUV. In recent months, he has looked at prices and compared financing alternatives hoping to find one that allows him to have an “attractive” monthly payment. But so far he has not been able to find a scheme that meets his needs. “Most of the loans that I could access are for 72-month terms and I really don’t want to get into debt for that long,” he says outside a dealership.

During his last visit to one of his closest dealers, he was recommended to consider balloon credit , a financing scheme that some vehicle brands began to offer about five years ago and that has become an interesting option in a context of generalized inflation.

The advantage of this scheme is that it allows the consumer to finance a part of the total price of the vehicle and obtain a competitive monthly payment for 36 or 48 months, with the possibility of deciding, once that time has elapsed, if he wishes to refinance the pending amount or leave the vehicle as a hitch for a new one.

For brands, it is a way to shorten vehicle renewal time: instead of having to wait five or six years for the customer to finish paying their traditional credit, they will have it back in three or four years.

“It’s a win-win,” says Edgar Carranza, CEO of Hyundai Motor de México, a company that launched, in partnership with BBVA, a little over a year ago, a balloon loan under the name “Smart Purchase.”

What is a balloon or global credit?

In traditional financing, customers are required to pay the full amount of a vehicle through a fixed monthly payment for a certain period, from 12 to 72 months in most cases.

As with a traditional loan, to access a car through the balloon loan you have to make an initial payment, or down payment, which ranges between 10% and 30%. But in the balloon or global the total amount is not financed, but only a part that is covered in up to 48 months.

After that time, the customer can decide whether to pay the remaining amount in cash, refinance it or return the vehicle to pay off the debt and use the surplus to use another model of the same brand. In this last case, the dealer makes the valuation of the financed unit and takes a part of the price to settle the outstanding amount -known as a balloon payment-, while the remainder could be taken for the down payment of a new vehicle.

“The balloon is very attractive because it allows you to have lower monthly payments than traditional credit and an agreed repurchase price after two or three years. In such a way that you leave your unit, as a down payment, and take a new vehicle every two or three years,” explained Horacio Chávez, CEO of Kia in Mexico.

Is it convenient to buy a car under this scheme?

For a few months, general inflation in Mexico, an indicator responsible for measuring the behavior of prices in the country, has been well above the limits set by the Bank of Mexico for it. This scenario has led the central bank’s Governing Board to increase the reference interest rate to 8.5%, its highest level since the country began its current monetary policy.

Brais Álvarez, account manager of the consulting firm JD Power, details that this inflationary context has marked two trends in terms of automotive financing: asking for longer terms , which today are offered by brand finance companies; or opt for the balloon credit. Although in both cases consumers can obtain a low monthly payment, the conditions change.

Brands like Kia clearly see both trends materializing on their sales floors. “What is happening with financing is that the terms are being extended, the most common in the industry is 60 months and a lot is also going to 72 months. But we, on the contrary, are trying to make the cycles are shorter,” Chavez said.

Ulises Rosas, independent advisor for the purchase and sale of automobiles, points out that the balloon loan is convenient for those people who have their expenses and income in order, since the main thing to benefit from this scheme “is planning.”

“We must be realistic if we are going to opt for this credit. If you have enough for a down payment of up to 30%, and then have small monthly payments, then go ahead. But we must not lose sight of the fact that in the end there will be another ‘strong’ payment, if the client wants to keep the vehicle. For this reason, if you plan your finances and program yourself to save and supplement that payment at the end, I consider that there is nothing better than the balloon loan, ”he adds.

What brands offer it in Mexico?

Nissan was one of the first automakers to offer this alternative in Mexico. It did so through its premium brand Infiniti, which in 2018 launched this financial product under the name of Selectiviti. Almost at the same time, the South Korean brand Kia presented Kia Access and defined it as “the financing plan with the most comfortable monthly installments that allows you to renew your car every two years.”

Since then, more automakers have incorporated the balloon credit into their financial offer. Toyota , through its financial house Financial Services , offers one with an initial down payment from 10%, terms from 24 months and a final payment of between 25% and 30% of the value of the vehicle.

“Enjoy low monthly payments on your financing and once the time comes to make your final payment, you must settle it by choosing one of the available options,” it says on its website. Among the options at the end of the agreed term, it contemplates the refinancing or liquidation of the unit and also, renewing the vehicle with which the plan began through a new credit.

Ford has Ford Blue , a plan that considers a down payment of 25%, 35% or 40%, with monthly installments of 12, 24 or 36 months and, if the customer wishes to keep his vehicle, requires a final payment of 35 % financing. Its competitor General Motors has the Flex Pay scheme, which requires a down payment of 20% of the value of the vehicle, offers terms of 24 and 36 months, and gives the possibility of keeping the unit through a final payment, the refinancing of the same or exchange for a new vehicle.

Also the premium brands, Audi and BMW among others, offer a balloon alternative.

The challenge facing brand financiers, Álvarez believes, is to adequately convey the benefits of the scheme. “A monthly payment of 5,000 pesos can be attractive and comfortable, but when the client reads that he has to make two large payments, one at the beginning and the other at the end, he stops seeing the ad,” he said.

Today, Mexican consumers are more familiar with the traditional scheme: make a down payment and then pay 60 fixed monthly payments.

“It has been difficult to convince people to try balloon credit, but in our case, thanks to the fact that we have trained the sales force, we have had exponential growth in recent months. I think that in the next two or three years this scheme is going to become popular,” Chavez concluded.

With information from Ivet Rodríguez

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