Beware the Pop of Balloon Payments
October 8, 2018
Residual payments or balloon payments are important considerations to make when negotiating a car loan.
Having a balloon payment may seem like a good idea. That’s because it allows everyone to afford a car by making the monthly payments that much less.
Sounds like a wonderful concept. But many car buyers have fallen victim to the attraction of brightly bobbing balloons luring you into a dubious contract. Balloon payments mean having a giant cash amount to pay at the end of your payment period!
Balloon Payments Gain Interest with Car Buyers
In spite of this, both ABSA and Wesbank say that the percentage of vehicle finance applications with a balloon payment are continuing to rise, and Rudolf Mahoney from Wesbank says that they have experienced a significant increase in the number of applications for vehicle finance asking for a balloon payment.
The main reason for the increase in vehicle finance with a balloon payment is affordability concerns. And with reduced monthly installments, these balloon payments are a lifeline to owning a car.
Balloon Payments mean Smaller monthly Payments
Usually one spreads the price of your brand new car over a typical finance period of 5 years for instance. With a balloon payment you defer a percentage of the lump sum to the end of those 5 years.
This allows for you monthly installment to be far less over the normal finance period. At the end of the 5 years, the bubble of low payments suddenly explodes in your face. Now have to find the money to pay for the outstanding amount. And that can add up to tens of thousands of rands!
Some people, when they realise, this, don’t think it makes sense. They think that the balloon amount should rather be added into the price of the car. That’s so that the buyer knows exactly where they stand.
Just imagine if you buy a car for R200,000 and arrange for a balloon payment of 30%. So at the end of the 5 year finance period, you may well have been enjoying lower monthly installments. But now you have to find R50 000 to pay the bank.
Your Residual Refinanced
All is not totally doom and gloom, because for the residual value, it can be refinanced and you start paying the R50 000 over the next 2 years. So in effect, instead of paying over 5 years, you’ll be paying over 7 years.
Of course it is tempting to buy your dream car, but the moment you drive it out of the dealership it falls in value. If the dealer offered you a repayment period of 60 months to make the repayments lower, after the 5 years your car would have lost 50% of its value. With balloon payments you have a debt which you are not paying off, but merely paying interest on!
Sometimes you are still paying off you car when you want to sell it. According to the banks, the biggest reason people get turned down for their home loans is because of their car debt. It is far better to pay more for the vehicle up front, which includes a deposit payment as well as finance charges.
By paying a deposit, you can reduce the capital amount financed by the bank and spare yourself having to pay less in interest. Any size deposit will help reduce monthly repayments, without all the the disadvantages of balloon payments.
You’ll be Totally Deflated when Your Balloon Pops
Just remember that the ability to get out of balloon payments can also pose problems and you may be responsible for for terminating your contract early and you’ll be charged for this.
It is important to understand the penalties applicable and to also understand that comprehensive motor vehicle insurance is the only insurance accepted with a balloon payment.
Balloon payments are by no means the best solution for everyone and you need to do thorough research if you don’t want your tantalizingly magical balloon to pop and spew its hidden toxins into your face.
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All info was correct at time of publishing