Keith Donnelly, general manager at Westbury Chrysler-Dodge-Jeep-Ram in Jericho, N.Y., said the lack of a balloon note, which blends features of a loan and a lease, has been a competitive disadvantage for Ally. "We do a lot of them already" through local credit unions, he said in a phone interview.
However, Donnelly said it's unusual to offer balloon notes on used cars. He said the dealership doesn't have any other lender that offers balloon notes for used cars.
Jonathan Grant, dealer principal at Central Avenue Chrysler-Jeep-Dodge-Ram in Yonkers, N.Y., agreed. "Used opens up a whole new market," he said.
A balloon-note loan combines the features of a loan and a lease, said Tim Russi, Ally executive vice president.
It's a loan in that the customer's name is on the title. Like any other loan, the customer can sell the car whenever he or she wants as long as the remaining balance is paid. Unlike a lease, there are no specific per-mile penalties for excess mileage.
Like a lease, monthly payments on a balloon note are based on the customer in effect borrowing only the difference between the upfront cost of the vehicle and what the vehicle will be worth at the end of the term.
In Ally's case, the customer can choose 48 or 60 months. What's different about a balloon note is the last payment.
In a lease, at the end of term, the customer can walk away or purchase the car for the residual value. At the end of a balloon note, the customer in effect owes the entire residual value. Unlike a lease, the balloon-note customer still has to pay the lump sum at the end even if not intending to keep the car.
By way of comparison, according to ALG Inc., the average predicted residual value for mainstream brands for a 48-month lease is 39.4 percent. On a $25,000 car, that would be $9,850.
Ally said it has taken a conservative approach to establishing the balloon payment amount for new vehicles at less than ALG residuals. The idea is that the consumer is expected to be in an equity position at that time -- that is, the car is expected to be worth more than the customer owes. Of course in addition, the more money the customer puts down, the smaller the lump sum would be.
Some car-shopping Web sites for consumers tell customers who take a balloon-note loan to take advantage of lower monthly payments during the life of the loan to set money aside for the final payment at the end.
"We tell people to think of it as a deferred down payment," said Westbury's Donnelly. "You take the down payment and put it on the back end. It's a great way to achieve a certain payment level."
Russi said there's a good possibility that at termination, customers could refinance the balloon payment, assuming they qualify for financing, and buy another car from the same lender and the same dealer.
"There's a refinancing opportunity on the back end, depending on how the consumer has performed," Russi said.
He said that a customer in a 48- or 60-month balloon note is much less likely to be upside down than a customer in a standard loan for 72 months or longer. "Upside down" means the customer owes more than the vehicle is worth. "In equity" means the car is worth more than the remaining balance.
"The way we structure the balloon, it helps them to be in equity within the life of that term," Russi said.