Balloon-payment car deals on the up
Know what you’re getting into when financing a car
● “A balloon payment is a mechanism to try and make a car that is outside of your reach fit into your monthly budget — we recommend that clients actually not opt for balloon payments and rather buy more affordable cars.”
That was vehicle finance market leader WesBank’s advice in March 2015, when 18% of its total deals signed every month — for new and used cars — included balloon payments, typically 28% of the sale price.
That percentage has almost doubled since then — now 33% of all finance contacts signed with WesBank have a balloon payment of about 30%.
In other words, to get the monthly repayment down to a figure the buyer can afford, 30% of the price of the car is carved out of the deal and lumped on to the last month — usually month 72 — as a massive final payment, which must either be settled in full or refinanced at the end of the term.
Car prices driving trend
Almost half — 49% — of all WesBank’s newcar deals now have balloon payments, versus 30.6% of new-car deals in March 2015. The percentage is lower for used-car purchases — 22% of WesBank’s used-car transactions have balloon payments.
Clearly, WesBank is no longer actively discouraging balloon deals.
“The reality is that car prices have increased between 30% and 40% in the past two-and-a-half years, along with the total mobility cost basket: the price of petrol and insurance has also soared,” says Rudolf Mahoney, WesBank’s head of brand and communications.
“And consumers’ incomes have not nearly kept pace, so we’ve had to become flexible with our finance structures to help people get into new cars.”
A lot can happen to a person’s financial status in six years.
They could no longer be eligible for a new loan, due to an impaired credit record, or the new finance deal comes with a much higher interest rate.
“We find that very few customers actually keep their cars for the full 72 months,” Mahoney says. “The average replacement cycle is 44 months — that’s when the average motorist wants a new car.”
With break-even point being only at around month 54 or 55 — the point where you no longer owe the bank more than the car is worth — that creates challenges for the dealership, Mahoney says.
“The consumer who decides they want a new car in month 44 needs to pay the remaining instalments and the dealer is under pressure to come up with some kind of trade-in assistance to get the deal,” Mahoney says.
It’s like a long-term rental
Another factor driving the balloon deal figures is the increasing popularity of the “guaranteed future value” deal — also known as a guaranteed buy-back — offered by almost all manufacturers.
These are usually structured over 36 months with 60% residual value — essentially the car’s resale value is set at what it’s expected to be at the end of year three.
But there are major limitations — it’s not for those who do high mileage, as the mileage is limited to, for example, 10 000km or 15 000km a year, and the car must be kept in spotless condition. “It’s a lot like a longterm rental,” Mahoney says.
At the end of the 36 months, the consumer has the option of giving the car back to the dealer, trading it in for a new model or paying that very large balloon payment to own the car.
The upside is that instalments are low, and the car is covered by both a warranty and a service plan during those 36 months.