Acturater

Has anyone here purchased the C63 using the balloon finance option? I see it on the 'estimate payments' section of MBUSA's website, and I'm wondering what kind of residual assumptions they use. For example, do they assume your balloon payment at the end of 60 months will be 45% of MSRP, or something like that?


Thanks in advance.

JPMBenz

I never ever recommend a Balloon. I either do lease, finance, or straight purchase.

Acturater

What makes you say so? I know you know your business around here, but still curious. I thought there could be potential advantages of balloon financing, such as lower interest rate (penfed) and potential tax benefits on interest payments.

jeremyf0923

The advantage is that you will have more affordable monthly payments; however, you will have a large lump sum payment due at the end of the loan. That could become very risky if by chance you don't have the money to pay it off. In the US, you can't write off auto interest unless you can justify it as a business expense.

I agree with JP - either lease or do traditional financing - balloon financing ends up getting people in more trouble than helping them. Do a Google search on this topic and you will find a load of supporting information.

Acturater

Thanks. In general I'm definitely on board with both you and JP, especially if this is an interest-only loan (can be very dangerous I understand). I was hoping there would be some kind of standard "residual value" generally used for MB balloon loans, but I guess this isn't the case judging from your comments.


My end goal was to fashion my own lease terms, so to speak, by taking advantage of the balloon loan option. If this is a more case-by-case negotiation I might just go talk to a dealer and see if the math works out. I am expecting this will be a bad deal, just as you said, but I'm one of those people who just have to find out for themselves...

mister2d

Nothing wrong with balloon financing. Like a lease, you know all the financial details up front. The lump sum at the end is just that, a lump sum. You can still trade your car or sell it, OR refinance the lump sum. Some states require the banks to use the same interest rate for the refinanced limp sum as the original loan. That could be an advantage if rates go up in later years.

With rates as low as it is these days, there really isn't any risk. With good credit, you are barely paying interest since most of your payment goes toward the principal. Maybe back in the day when rates were higher one could be steered away from balloon financing, but I think its a great option now.

Acturater

I just did some quick math and the following are the apparent residual assumptions for the C63s when balloon financing.

24mo: 48%
30mo: 43% (I know, don't ask me why)
36mo: 45%
48mo: 34%
60mo: 28%

That's a hell of a lot of depreciation they're baking in to these cars.

mister2d

Yep. That's usually the case. The depreciation is 1000x better for Toyotas.

looney100

I'm confused... With balloon financing, you own the car, you just pay less monthly in the beginning in exchange for a large lump some payment at the end, and a higher overall total payment.

Unlike leasing, depreciation shouldn't be a factor in the financing - unless there's some strange arrangement where the dealership might take the car back.

jeremyf0923

Yup - I thought the same...

Acturater

We're saying the same thing, I'm just putting numbers behind it. The question is what is the lump sum remaining at the end of the balloon finance term? That's the residual value you can buy out the car for, same as in a lease. The residual value would be what remains after depreciation.

In straight financing I agree with you, depreciation wouldn't matter with regards to monthly payments. Technically speaking, in this case the depreciation is 100% and residual value is 0% from a financing perspective (obviously not from a resale perspective). With balloon financing the remaining lump sum is the residual from a financing perspective.

mister2d

Depreciation IS a factor in balloon financing. This is how your payment gets calculated.

Say you bought a $100,000 car and the depreciation is set by the bank at 50%. You would then be financing 50K over the monthly term plus interest with a 50K lump sum payment as your last payment.

Almost exactly like a lease, except the buyer is assuming the risk at the end since the car is theirs and not the bank's. In a lease scenario the bank takes the car back at the end of the lease (no matter what the value), unless you buy it out somehow.

JPMBenz

With a lease; if you are involved in a accident/carfax issue, you simply walk away. You have zero diminished value. The only good thing about a very low residual on the lease is you may have equity at the end of the lease.

mister2d

Same with a PenFed balloon loan. They include GAP free of charge.

JPMBenz

We are talking about two different things, I think. My point was if the vehicle was involved in accident during a lease; it's meaningless to you. If you own the vehicle (purchase, finance, or balloon), you how have to deal with diminished value. GAP simply covers if the vehicle is totaled. MBFS includes GAP on all of their leases.

mister2d

Yep sorry. I assumed you meant a vehicle in a total loss situation.