Owning a car is one of the most exciting milestones one can achieve in one’s life. Whether you are buying your first or fifth car, that feeling is just incredible.
When buying a car, like most South African motorists you are probably going to finance the car purchase and you might hear your salesman at the dealership asking you: “Would you like to have a balloon payment finance deal?” HUH??
Let’s look at what a balloon payment is and what are the pros and cons of having it.
What is a balloon payment?
Adding a balloon payment option when buying your car through vehicle finance allows you to take a portion of the amount (usually 20% – 35%) of the purchase price to defer it until the end of your finance period, making the car monthly instalments become more affordable. In essence the balloon payment acts like the deposit you would otherwise have put down on the purchase of the car.
Why do people consider balloon payments when buying a car?
- Statistics have shown that the average person who considers a balloon payment cannot afford the monthly instalments on the full 100% financing.
- Some customers are sold on the idea of a lower instalment.
- Others might just want to buy the very best car they can – at a lower monthly cost.
What are the advantages of having a balloon payment?
- Lowers your monthly instalments.
- Increases cash flow when times are tough, and you need to refinance your car.
What are the disadvantages of having a balloon payment?
- Please understand that the deferred amount still needs to be paid in full on the last day of your car payment, meaning you will still need to put money aside for that day.
- The deferred amount can be refinanced but that means you will be paying more interest.
- The bank may not approve refinancing on your deferred amount.
Let’s run some numbers: say you are purchasing a car that costs R500, 000.00 at an interest rate of 7% per annum, over a 72 month period. You choose to defer 25% of the purchase price, meaning you will be paying your monthly instalment based on R375, 000.00 and deferring R125, 000.00 to pay at a later stage.
|Exclusive of balloon payment||Inclusive of balloon payment|
|Estimated monthly instalment||R8 545.09||R7 139.75|
|Total interest paid||R114 038.97||R138 156.02|
|Balloon payment at the end||R0||R125 301|
|Total repayment||R615 246.48||R639 363|
Most people, who opt for a balloon payment, forget that at the end of their payment period, they will need to repay the deferred amount in cash and, when they can’t pay it, the added borrowing can place them in a consistent cycle of debt.
Therefore, choose wisely. If you cannot afford the normal monthly payment, maybe it would be better to opt for a cheaper car – or the money you thought you were saving may be your trap later.
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