Can you really afford the cost of balloon payments?
01 August 2022
With changing rate interest cycles, there’s continued pressure on consumer spending, making balloon payments a very attractive option when buying a new car.
The number of customers that have taken up balloon payments, along with extended vehicle finance terms have been on an upward trend in the past few years. Available data indicates that customers that have refinanced 2 or 3 times with a large balloon amount are at an increased risk of defaulting on their payment, which defeats the purpose of taking up the balloon in the first place.
We ask Absa’s Sarvas Naidoo and CMH’s Joel Chetty what needs to be considered before taking up a balloon payment on your next car.
What is a balloon payment?
Joel: A balloon payment is a lump sum payment that is due to the financier at the end of the loan term. It reduces the repayment and makes the loan more affordable.
Which common pitfalls should one be mindful of when including a balloon payment as part of your vehicle finance loan?
- Well, you’ll continue to pay interest on the total loan amount outstanding and will still be liable for payment of the balloon amount at the end of the finance term. You may end up paying more interest and fees with the balloon than without.
- The declining value of the vehicle may leave you with a huge gap between the outstanding value of the loan and the market value of the vehicle. This means a greater risk should you have an accident or lose the vehicle.
- The breakeven position may take longer to reach depending on the value of the vehicle and its ability to retain value.
- Consider where the funds to pay for the final amount will come from. It may be savings, a bonus cheque or you may be refinancing the balloon amount which will extend the repayment term even further. Extending the repayment terms means you have the same risk of having an outstanding balance which is higher than the actual value of your car.
Do you have any final suggestions with regard to balloon payments?
Joel: Taking a balloon amount may seem like the easy option when you’re at the dealer and eager to secure the new wheels you’ve had on your vision board. Explore your options first and make this part of your research when making a decision.
Reconfigure your budget to assess the true cost of the car including insurance, fuel, services and repairs. Delaying the purchase of the new car may also be an option if you anticipate an increase in your income or the reduction of another loan to free up money that could go towards the vehicle costs.
Age-old wisdom cautions against spending beyond one’s means. Likewise, your option to finance your new set of wheels should not lead to short-term gain at the expense of long-term financial stability.
To apply for Absa Vehicle Finance, visit our Absa Vehicle Finance section.
For more information on how you can become a better consumer, lookout for our Street Smart series.
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.