The most common ways to purchase a vehicle are:
• Pay Cash
• Finance through a traditional loan
• Lease
• Balloon-Payment Finance

Of the method’s list above, both Leasing and Balloon Payment Finance could be considered ‘creative’ finance methods. Banks and Leasing companies use residual value guides supplied by either ALG or Black Book. The prices listed in these guides are projected future values based upon % of original MSRP. The data to determine these values comes from years of monitoring the used car market and auctions all over North America.
Here’s how things can get creative. Since these values are set, depending on vehicle selling price and the rate you can get, it could be possible to get a great payment on a car that might otherwise be unaffordable

Let’s quickly look at a balloon loan;
• Range Rover MSRP $95,000
• Auction Price USED $70,000
• 48 Month Residual $34,000

With a balloon you can stretch the amortization period. So a 48 month balloon might have an 84 month amortization meaning that your payments are based upon the difference between now ($70,000) and the 48 Month Residual ($34,000) instead of on the true value of the truck, $70,000. Similar to mortgage products, these payments can also be made weekly, bi-weekly, semi-monthly or monthly. An 84 month amortization means that if you were to take a traditional loan, it would take you 84 months to pay off the entire $70,000. Instead, your payments will be based on the $34,000 financed + interest on the entire amount of the loan ($70,000). In four years you would still have a balloon payment to make ($34,000) and your options would be to sell the vehicle, trade-it in, refinance it, pay cash for it, lease it or hand it back. With skyrocketing lease end charges one of the major advantages of balloon payment are the end term options. Where the financing can get really creative is if you were to get a great deal on the vehicle you have chosen. Let’s say that you somehow managed to get the vehicle in this example for $60,000 instead of $70,000. The four year price remains the same at $34,000 but you would be financing $10,000 less. Here are two examples to illustrate with I mean:

Financial Details:

Principal Amount:	$70,000.00
Payment Amount:	$1,053.07
Balloon Payment:	$34,352.09
Interest Rate:	6.900%
Interest Compounding:	Monthly
APR:	6.900%
Total Amount Financed:	$70,000.00
Total Payments:	$84,899.45
Total Finance Charge:	$14,899.45

Principal Amount:	$60,000.00
Payment Amount:	$814.07
Balloon Payment:	$34,352.09
Interest Rate:	6.900%
Interest Compounding:	Monthly
APR:	6.900%
Total Amount Financed:	$60,000.00
Total Payments:	$73,427.36
Total Finance Charge:	$13,427.36

I hope you found this explanation and the examples helpful. Remember, there are a multitude of factors that determine payment; rate, term length, finance product, and trade-in value. If all these factors were the same, I’m sure you and you colleague would arrive at exactly the same payment.