Choosing the right financing option for a new vehicle can be tricky, especially when it comes to balloon payments. A simple internet search of the term brings up a barrage of dire warnings, yet the option to take one remains commonplace. Kutlwano Mogatusi, communication specialist at Wesbank, says that the key to balloon payment management is discipline and financial honesty.
“Balloon payment” is a term that often appears when discussing vehicle finance for a new or used car. Mogatusi says that the financial mechanism lowers your monthly vehicle installment, making it more affordable.
“A balloon payment allows a buyer to take an amount owing on the total purchase price of a vehicle and set it aside. This results in the monthly installment amount being calculated on a lower value, which in turn makes the repayments more affordable. So, you’re essentially paying off a loan for most of the car, but here’s the catch. Not all of it.”
The amount set aside from the total price of the vehicle is still owed by the buyer, and is due to be paid at the end of the repayment term. In other words, if R30 000 is set aside from the total purchase price of your vehicle to make your monthly payments lower, you need to pay that R30 000 at the end of your repayment term.
Mogatusi explains that it is incredibly important for a car buyer to understand exactly what they are getting into when they agree to a balloon payment.
Be honest and responsible
“The reality is that factoring a balloon payment into the finance agreement of your next vehicle purchase may come with some appealing benefits, but it is ultimately up to you as the purchaser to make sure that these benefits are clearly understood upfront. Being responsible with your money and keeping within your budget are key to managing a balloon payment options.”
While balloon payments make your repayments more affordable, Mogatusi says that car or bakkie buyers should not take them out if they cannot actually afford the vehicle.
“It should not be used to buy a car that you can’t afford. Balloon payment deals require discipline. If a buyer is not financially savvy enough to manage cash flow and continue to save during the finance term, then a balloon deal is probably not the best option for that person.”
Reaching breakeven point
Another term that Mogatusi advises car buyers get familiar with, is the “breakeven point”. This, she says, is when the vehicle’s trade-in value is the same as the amount still owed to the bank. “When calculating the breakeven point, it’s important to remember to include the amount set aside upfront, and still outstanding, in the balloon debt at the end of the loan period.”
Knowing when you reach the breakeven point is important because this is often the ideal time to trade-in or sell your car. Balloon payments can delay reaching the breakeven point, but putting down a healthy deposit on your car can bring it forward, advises Mogatusi.
“Being in a position to put down a healthy deposit on a new or used car will always reap returns further down the financial road. [It] lowers the monthly repayment costs and the deferred debt held in the balloon. Another advantage is that you won’t be liable for additional debt at the end of your finance period.”
Manage your cashflow
Ultimately, she says, balloon payments are meant to assist with cashflow management. The mechanism is not meant to help buyers purchase a car they cannot actually afford.
“The outstanding lump sum payment, after years of driving a vehicle, is easy to ignore or forget. But setting the debt aside always remains the responsibility of the buyer. At the end of the day, all that is left to say is that customers need to be honest with themselves with regards to a personal financial situation and budget management when deciding whether a balloon payment is suited to them or not.”
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