balloon loans??

skintdairymaid

My partner is self employed and looking to purchase a new tractor. He has discussed some figures with the rep and a balloon loan was mentioned. The rep is coming to see us next week so just wanted to be armed with the right info! It sounds good in principle as it means the business monthly repayments will stay manageable but it's the bit at the end that worries me. It would be over 5 years by which time we would be needing to replace it, if not sooner. Would be grateful for any advice or anything to watch out for. Many Thanks

jonesMUFCforever

You should remember that the 'balloon' payment has to be repaid at the end of the loan agreement.

Ask yourself if you are struggling now where is the money coming from?

Not being an agricultural person I have to ask why will it not last more than 5 years? Most farmers I know have old rickety things that seem to last for ever!

skintdairymaid

Thanks for that. We replace them sooner because we are contractors and farmers tend not to employ contractors whose equipment is older than their own!! If we trade in against another machine and the final balloon payment is less than the trade in value would that mean we didn't have a lump sum to pay?

jonesMUFCforever

Depends - at the end of the day you are only pushing debt from now to then and then again to some future date.
Eventually you will have to pay.
Can you put your prices up slightly to pay for the tractor? or can you use the farmers tractor meaning not requiring it at all - from what I can gather this is going to put a strain on your finances so why bother?

RichGold

jonesMUFCforever wrote: »

can you use the farmers tractor meaning not requiring it at all

If they are self employed they need there own tools, or a tractor in this case. You can't just rock up and use whatever is lying about otherwise you can only charge labour, rather than for providing a service.

jonesMUFCforever

RichGold wrote: »

If they are self employed they need there own tools, or a tractor in this case. You can't just rock up and use whatever is lying about otherwise you can only charge labour, rather than for providing a service.

...But if they cannot afford the tools what is the point? Surely better just to get paid for working or am I missing something?

skintdairymaid

we can afford the repayments they would in fact be less per month than we are currently paying on our finance agreement. Sorry if I didn't make this clear. It would prob free up some cash per month to purchase more equipment and expend the business. We always trade in equipment before the end of the finance so never really own the tractors. Never having had a balloon loan before we just wondered what people in the know thought. Thanks

paddyrg

I would be wary of expanding the business through debt, especially when you know there will be a nasty surprise in 5 years, long enough for all sorts of circumstances to change (eg child on the way, house flooded needing underpinning, whatever). How busy will your partner be? From my days on the family farm I gues it is seasonal work - is it possible to hire as required? Basically only paying for the kit on the days/weeks it is needed, even if that does cost more at the time it means no nasty surprises down the road. And remember to factor into the rental equation that someone else does the servicing, takes the depreciation hit, etc.

I am quite debt-averse as you can probably tell ;-)

Tixy

Regarding your question about balloon loans (and not about whether to buy a tractor on finance) things to look out for

- can you afford the repayment balloon at the end. Will the value of the tractor cover it. I know you've said you usually trade them in but if the balloon is larger than the value of the tractor then you'll have to stump up extra money. You also will have no deposit towards the next tractor.

- another reason for wanting to be certain the tractor value will cover the balloon payment is if for any reason you stopped trading (ill health/lack of work/lack of ability to make profit etc) you don't want to end up with a debt of a higher value than the asset.

- cost of finance - don't just look at the APR figure - generally balloon loans cost more - as you are borrowing more money for longer (the balloon amount is owed all the way through and so you pay interest on all that amount for the entire finance period). Look at the total cost of credit.

If you could afford monthly repayments with no balloon I would think this was a far better option. If you feel you can't afford without the balloon then keep the balloon as low as you can afford to do so. Don't be talked into having a higher balloon than you need by the finance salesman.
And as with any finance salesman - if he mentions an interest rate clarify if he is talking flat rate or APR. If he mentions flat rates then ask him for the APR - or make sure you convert it yourself.