What is a Car Balloon Payment?
Ballooning your vehicle repayments will allow you to buy the car of your dreams. But is it worth it? So what is a car balloon payment?
Balloon, also known as residual payments at the end of the finance agreement, hits you with a lump-sum payment due at the end of the contract.
So, before putting pen to paper make sure that you can afford those terms and conditions. A residual payment at the end of your contract could hit you for six!
What is a car balloon payment?
Well, a balloon payment allows you to drive a car that may just be too expensive to meet the expectations of your bank balance. It allows you to pay a lower installment that would be the norm over the finance period but it will hit you with a lump sum payment at the end of the contract.
So, when you let your hair back in that convertible that you actually can’t afford, remember that at the end of your contract you will have to pay a one-off settlement fee or seek re-financing – subjecting you to paying even more interest and fees.
Who offers me balloon payments?
You don’t have to use the bank that your car dealer chooses. You are entitled to ask for different quotes from other finance banks. Remember, you are in control and take the best deal that suits you and not the dealership.
Look at the odds
An increasing number of buyers are opting for the best possible finance structures to lower their monthly repayments. These can include balloon ( or residual) payments because these take advantage of the longer repayment periods offered by banks since the National Credit Act (NCA) came into operation.
Use your head when buying a vehicle
WesBank’s Rudolf Mahoney’s comments should never be overlooked. He says consumers are more times than not led by their hearts rather than their heads. Maloney says motorists should resist the urge to splurge on a vehicle beyond their price range.
Lower monthly payments, he warns, will end up costing you a whole lot more.
Why balloon payments have grown in favour
Since the introduction of the National Credit Act (NCA) in June 2007, the popularity of balloon payments has increased by 60 percent. It’s also significant to note that since the introduction of the NCA the majority of buyers have opted for longer periods in which to finance their vehicles.
Beware the pitfalls of lower repayments
Yes, balloon payments will lower your monthly payments, but the disadvantages are real, says Mahoney. Driving that vehicle you really can’t afford means that it will cost you a lot more in interest repayments over the period of the loan, and balloon payments also attract interest and could cost even more if you have to refinance.
Two types of balloon payments – What is a Car Balloon Payment
There are two of balloon payments – ownership and non-ownership residuals.
Ownership payments make you responsible for repaying the outstanding lump sum at the end of the loan term, while non-ownership means that the financier of your vehicle is the owner at the end of the loan period. Ensure that you understand which of these two options you are agreeing to contract into.
What does WesBank have to say?
WesBank has three tips for a prospective buyer:
Say no to balloon payments
WesBank points out that at a balloon payment of 20 percent on a vehicle costing R240,000, monthly repayments will amount to R4,739.58 over a five-year period based at an interest rate of 11.5 percent. At the end of the finance term the buyer will have repaid R284,374.84 but will still owe a balloon payment of R48,000, At the end of the day, the vehicle will have cost a staggering R332,374.84.
If the owner decides to trade in the vehicle, the outstanding balloon amount will be subtracted from the trade-in price. If the owner chooses to keep the vehicle they can either pay the amount as a lump sum or refinance the outstanding amount at additional costs.
Financing without balloon payments
In comparison, financing the same vehicle with no balloon payment would cost R5,335.23 over a five-year period based on an interest rate of 11.5 percent resulting in a total repayment of R320,113.55. That is an enormous R12,261.29 less than a balloon payment deal.
Opting for shorter repayment periods
Save in the long term by opting for shorter repayment periods. If we look at the same vehicle which cost R240,000 vehicle financed at 11.5 percent interest over six-year-period, monthly repayments will amount to R4,686.88 or a total repayment bill of R337,455.18.
But, on the other hand, if you opt for a 54-month contract it will save you a whopping R25,821.80. Your monthly repayments would be R5,770.99.
The merits of paying more upfront – What is a Car Balloon Payment
Paying a deposit on a vehicle will reduce the capital amount financed by the bank and will, therefore, reduce interest payments. Yes, you can buy a vehicle without paying a deposit but that won’t help you to reduce your monthly repayments.
Also pay upfront for any extra bells and whistles like tow-bars, canopies and bicycle racks.
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All info was correct at time of publishing June 5, 2018
