Final Installment

The term final installment is immediately associated with a car loan, as this is the most common loan in which a final installment is agreed in the repayment schedule. In general, the term final installment refers to a remaining sum to be paid at the end of a loan term that fully redeems the loan. Credit institutions and banks offer many different types of loans and financings; some of these include a final installment that is to be paid as a single last payment after the monthly instalments have been made.

The final installment is almost always equal to or even higher than the total of the monthly payments. A final installment may be agreed not only for loans such as car financing but also as part of a leasing contract or hire-purchase agreement. Financing for other items (for example a construction loan) is less common, but may also be offered, especially during low interest rate periods.

Because there are various financings and loans with an agreed final installment—depending on what purchase is being financed—you should carefully review and compare all offers before signing a contract.

What is a final installment loan or balloon loan?

A final installment loan is often also called a balloon loan or balloon financing. A balloon financing is a loan in which a final installment is always part of the contract. The final installment usually accounts for more than half of the loan amount. Because of the large final installment, it is metaphorically referred to as a balloon. The advantage of this large final installment is the correspondingly low monthly payments. The borrower therefore remains financially flexible until the end of the term. The loan’s repayment plan is structured similarly to the payment plan of a lease agreement; the only difference is that the purchased item (for example a car or vehicle) is the property of the borrower from the outset. That is why balloon financing is especially popular as a car loan.

Balloon financings are offered by different credit institutions under varying conditions. To obtain the best terms and the lowest interest rates, you should not skip comparing offers. Making a down payment not only keeps the monthly payments low but also significantly reduces the final installment. This type of financing is particularly suitable if you expect a larger sum of money later or, thanks to the low monthly burden, are able to save up the final installment by the end of the term.

Of course, something unexpected can always happen, but banks and credit institutions also offer solutions for this possibility. For example, the final installment can be refinanced with an installment loan (follow-up financing). Alternatively, the purchased item—possibly a car or another vehicle—can sometimes be returned at the end of the term. Usually, however, an additional payment accounting for depreciation will then be due.

Car financing via leasing - the final installment in a lease agreement

A lease agreement is an atypical rental or usage agreement and represents an alternative to financing via a balloon loan. In leasing, the lessor obtains the leased item and makes it available to the lessee for use in return for payment. Leasing is very similar to renting, but the lessee usually has to bear maintenance or repair costs themselves, unlike conventional renting.

In a lease agreement, part of the purchase price and the depreciation are also paid via a monthly rate for a previously defined period. A remaining sum remains, which is equivalent to a final installment. This final installment or remaining sum can be paid in a single sum after the lease agreement expires.

To pay the final installment, the leased item (car) can be sold before the end of the contract, the leased item can be returned, or the final installment can simply be refinanced with an installment loan.

To conclude a lease agreement, the buyer’s creditworthiness is an important indicator and is carefully checked by banks and credit institutions. In principle, leasing is suitable for both private and business customers.

Final installment in hire-purchase

In a hire-purchase agreement, rent is paid monthly for an item. The purchase takes place some time later and is also completed by payment of a final installment. The statutory rules on purchase law remain unaffected. Despite the agreement of a rental contract, it is a purchase contract with a final installment; this contract defines the later purchase.

The terms of hire-purchase vary from provider to provider; careful checking and comparison of offers is particularly important. Usually, the hirer does not reserve an option right; hire-purchase is agreed from the start with the payment of a final installment. After the hire contract expires and the final installment is paid, the item becomes the buyer’s property.

A hire-purchase agreement is generally possible for anyone and significantly facilitates the financing of an item. If, for example, a buyer finances a new computer system, a vehicle such as a forklift, or necessary expensive machines for their company via hire-purchase, they can record these immediately as fixed assets, since under hire-purchase the item becomes their property from a legal perspective—unlike leasing. Hire-purchase with a final installment is therefore more comparable to a conventional installment loan with a final installment than to leasing. The final installment is an important component of the payment plan for many types of purchases.

Comparison and calculation of the final installment

No matter which type of purchase you choose, careful comparison is always important. What matters in a financing with a final installment? Minimizing monthly payments or having a final installment that can be redeemed without follow-up financing? Comparing the offers available on the market is essential. Whether it is car financing, hire-purchase, or construction financing, the final installment should be set so that it can be repaid at the end of the financing. A final installment financing is therefore particularly suitable if you expect to be able to save enough money during the term or, for example, expect fixed-term deposits to become available. If there is not enough money available at the end to repay the final installment directly, follow-up financing is usually possible, although the currently applicable interest rate will apply.

A final installment financing is fundamentally possible for any buyer and is a good option to preserve enough funds for living expenses despite monthly instalments. Due to the low monthly payments, final installment financing is advantageous because the borrower’s liquidity is maintained throughout the entire term.

The final installment agreed for all the purchase types presented here keeps the monthly burden low and thus particularly simplifies the purchase of a high-priced item, such as a car. By negotiating, you can also agree on a down payment with the seller and further reduce the final installment.

It is essential to inform yourself sufficiently before signing a contract, as well as to compare carefully. The internet offers the ideal way to analyze the purchase types offered on the market and thereby choose the best contract for the planned purchase. You should compare term, costs, interest rates and ancillary costs of the contract. Carefully reading the small print is always essential, as it defines all possible costs, such as possible chargebacks or in case of withdrawal from the contract.