Buying a vehicle is a long-term decision and we want to help you make an informed one with our Street Smart series, brought to you by Absa Vehicle and Asset Finance. In this episode, we chat with Absa’s Sarvas Naidoo and CMH’s Joel Chetty about balloon payments.
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With changing interest cycles, there’s continued pressure on consumer spending, which makes a balloon payment 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, has been on an upward trend in the past few years…
Available data indicates that customers who have refinanced two or three times with a large balloon amount are at an increased risk of defaulting on their payments, which defeats the purpose of taking up the balloon in the first place.
Cars.co.za social media specialist Kgahliso Nyamanewe asks Absa Vehicle and Asset Finance’s dealer group and alliance manager, Sarvas Naidoo and CMH’s finance and insurance manager for the KZN region, Joel Chetty, what needs to be considered before taking up a balloon payment on your next car.
What is a balloon payment?
CHETTY: 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.
What pitfalls should one be mindful of?
NAIDOO: 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 in fees with the balloon – than without it.
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).
What’s more, the breakeven point 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 from savings, a bonus, or maybe refinancing the balloon amount, which will extend the repayment term even further.
Extending the repayment term means you have the same risk of having an outstanding balance that is higher than the actual value of your car.
Do you have any final suggestions?
CHETTY: Taking a balloon amount may seem like the easy option when you’re at the dealer and eager to secure the new wheels you had on your vision board, but explore your options first and make this part of your research.
Reconfigure your budget to assess the true cost of the car including insurance, fuel, services and repairs.
Sometimes 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 cost.
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.
For extra information on how you can become a better consumer, keep a lookout for more episodes from our Street Smart series and be sure to visit the Absa blog.
Other episodes in our Street Smart video series:
Absa’s Fulufhelo Mandane and Hatfield VW Melrose’s Vleis Manyama explain the importance of getting and maintaining an acceptable credit score.
Absa’s Sbu Dhlamini explains the most pertinent terms in an instalment sale agreement. Understanding your instalment sale agreement [Part 1] and [Part 2]
Absa’s Michelle Moodley emphasises the importance of taking precautions to avoid falling into fraudsters’ traps. Vehicle Sales Fraud: What to look out for
Absa’s Fulufhelo Mandane discusses what you need to consider before you start shopping for a vehicle, the costs of ownership and your various finance options. Absa First-time Buyer Guide to Vehicle Finance
Absa’s Gordon Wood details how the new Aftermarket Guidelines, which were introduced in the motor industry last year, affect you as a vehicle owner. Absa’s Guide to Responsible Vehicle Ownership
Related content:
The New Normal, Podcast 3 – Time to revise your car insurance?
The New Normal, Podcast 2 – Car Dealerships of the Future
The New Normal, Podcast 1 – Changes in SA’s car-shopping patterns
