Balloon Payments

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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.

Example

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 paymentInclusive of balloon payment
Estimated monthly instalmentR8 545.09R7 139.75
Total interest paidR114 038.97R138 156.02
Balloon payment at the endR0R125 301
Total repaymentR615 246.48R639 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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1 COMMENT

  1. The scenario of the balloon payment is like talking about the pros and cons of a type of poison, but when all is said and done the poison is still deadly. The writer did a good job on the balloon payment, but the balloon payment is just a type of poison; while it can bring a slower death to the pocket it still remains deadly! Personally I think the real thorn in the flesh was overlooked – I’m referring to debt. When buying a car fancy terminology like vehicle financing is used, but does the consumer really understand what they are getting into?

    Firstly the financier creates the illusion to the consumer (hereafter referred to as Mr A for convenience, but applies to all genders) that Mr A owns the car. When Mr A buys the car via vehicle financing he gets to stay’ with the car i.e. he can travel around with it and at the end of the day he goes home with it as if it his. In fact if he buys it brand new the car dealership gives him a sort of celebration with the key handover e.g. ribbons, photo-shoots, etc. This creates a sense of achievement and heightens the false perception of ownership.

    The truth is Mr A does not ‘own’ the vehicle until everything is paid-off. In the event that Mr A defaults i.e. fails to re-pay the car loan, the car is re-possesed. That word says it all – repossess. You can only repossess, or take back ownership, of something that belongs to you; meaning Mr A was never the owner, but was all along impersonating the owner. The financier allows Mr A to act like the car owner, but the reality is that the financier is the true owner.

    ‘”So what?” , someone may ask. Well excluding the consumer who truly understands debt, Mr A gets into debt for public perception i.e. keeping up with the joneses. He doesn’t want people to see him use public transport for 72 months whilst his peers are driving. The financier knows and exploits this to the fullest and makes a killing from Mr A (hence the poison analogy earlier).

    Since Mr A wants instant gratification he overpays on the original vehicle price via interest, and at the end of 72 months he gets to finally own a vehicle that has depreciated both in book value and physically. He could have saved for 72 months and then bought the latest vehicle model available at that time, for cash and with no interest costs.

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