When you take out financing for anything one of the questions you need to ask is: “What is the AMORTIZATION of the loan?”
Amortization refers to the repayment of loan principal over time or the life of the loan. Loans are often amortized for 5, 6, 7 or 8 years for vehicles. Mortgages often have amortizations of 20 or 25 years some have previously even had 30.
The rate of interest you pay does not always have the same life time as your loan. This is known as your term.
The term of most automotive loans generally equals that of the amortization. So, if your loan is amortized over 60 months (5 years) your term is usually 60 months also. In finance we refer to this as 60/60.
As a promotional tool, many dealers will offer you a 60-month amortization but with a super low rate for a 12-month term – 12/60. At the end of that 12 months the loan jumps to a different rate, often significantly higher than the special rate. It’s important that you know what these conditions of your financing are.
Balloon loans – A balloon loan is a type of loan that does not fully amortize (complete to $0 owing) over its term. When the term is up you have choices: Pay out the balance (balloon payment); renegotiate the rate, where your amortization stays the same but you get a new rate for the term remaining on the loan; or renegotiate the whole thing, where you get a new rate, term and amortization. These options have their own benefits but only apply to certain instances. Most are only applicable to benefit business or commercial purchases.
All of the previously mentioned financing methods have you owning the vehicle.
Now if you are thinking that a balloon loan and a lease sound similar you’re right in that there are shorter terms and possibly lower payments. The challenge with leases is that there are a lot more conditions and terms you need to be aware of.
Next week: Leases
As the only remaining locally owned and family run dealership in Port Hardy, we at E.J. Klassen Motorcade want to help our community to continue to grow and improve. We want to help you fortify your credit against future dilemmas.
Remember, this is your credit, your money and your future. There are no silly questions. Read contracts, read pamphlets. Ask questions, ask for clarification if you do not understand something. Credit is potentially a long-term commitment; knowing what you are signing up for is important.
Feel free to come by anytime and we would be happy to look at your situation and see what we can do.