Can you really afford the cost of balloon payments?

03 October 2019

Customers who take up balloon payments on their vehicle finance agreements have increased significantly over the past five years. So much so that we can safely state that the majority of finance deals on new cars will have a balloon payment in the near future.

This is according to Faisal Mkhize, Managing Executive of Absa Vehicle Finance, RBB SA, Absa Group, who further said that the bank had found that customers who refinanced for the second or third time with a substantial balloon payment ended up defaulting three times more than those without a balloon payment.

Balloon payments are associated with instalment sale agreements. They allow a reduction in monthly payments by leaving a portion of the loan amount as a lump sum at the end of the contract period.

Mkhize cautioned vehicle buyers to be brutally honest with themselves when taking on balloon payments.

“When you take on a balloon payment, you are still paying interest on that portion of the loan even though a large chunk of the purchase price is placed into a balloon. The repayment of a balloon can therefore become an unexpected debt as this amount will either need to be settled or refinanced at the end of the term. Instead of having a deposit when you want to buy your next car, you have debt that is more than what your current car is worth. This is most often the case where a vehicle owner decides to trade-in and settle a loan much earlier than the agreed installment period.”

Tips to consider when taking on balloon payments:

  • Think about how you will pay the balloon off. If you think you would have to take out another loan to cover it, or refinance or even sell your car, is it really worth it? If the answer to that question is no, then it’s probably not the solution for you.
  • Use our affordability calculator, to calculate what your monthly instalments could be if you finance your car with a deposit or a balloon payment.
  • Use your head, not your heart. Calculate what you can afford without taking on a debilitating balloon payment. This might be the difference between choosing nice-to-have extras on the vehicle or going for what you really need.
  • Speak to your bank. They will be able to help you find the best and most practical solution based on your financial reality.
  • When choosing a car, think of it as a long-term commitment and focus on the benefits of making a decision that’s within your means: you get a much-needed car, and one that isn’t going to send you spiraling further into debt.
  • If there is no way to avoid taking on a balloon payment, take up top up insurance as well. If your car is involved in an accident – most insurance companies will only cover the retail value of the car. With top up insurance you will have peace of mind knowing that the total amount you owe on the car, including the balloon payment, is completely covered.

“We would advise customers to rather consider a maximum repayment term of 72 months without a balloon payment and save first so that they have a lump sum deposit of 10% to 20% when they buy the car,” concludes Mkhize.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.