Beware balloon payments

RESIDUAL VALUE: DEFERRED PAYMENT CAN REALLY HIT WHERE IT HURTS

Consumers often resort to refinancing their older model vehicle, which is out of warranty and service plan.

Wesbank CEO Chris de Kock says 95% of car purchase agreements finalised by Wesbank are now 72-month contracts; of those, 35% include a residual or balloon payment.

Take a R200 000 car, with a 12% interest rate, for example. Using the Wesbank affordability calculator, with a R20 000 deposit and a 54-month repayment term, the monthly repayment is R4 428.23. Financed over 72 months, with no deposit and a balloon payment/ residual value of 30%, the car’s monthly repayment is R3 429.63.

De Kock says previously, when consumers took out 54-month vehicle finance contracts with a 10% deposit, the point at which the outstanding finance amount intersected with the car’s resale value was usually around 36 months.

However, with longer car finance contracts plus a residual value, there’s a steeper depreciation curve and the intersect point is now typically around 48 months.

Wesbank’s Ghana Msibi warns buyers to be cautious of the amount put into a balloon because they’ll be responsible for the lump sum once the finance term is finished. “The repayment of a balloon can be an unexpected debt.”

Msibi adds that of the Wesbank consumers who take out contracts with a residual amount, only 5% opt to refinance the vehicle at the end of the initial hire purchase contract period.

The rest either pay off the lump sum, trade in the car before the contract expires, or negotiate a repayment agreement like paying off the residual amount over three months.

CP Naidoo & Partners’ Prem Govender says consumers forget that cars are depreciating assets.

“At the end of a longer hire purchase contract, you are left with an asset that is not worth anywhere near what you paid for it and you still have to cough up a residual amount of 30-35% of the original price.”

“Consumers, more often than not, resort to refinancing their older vehicle, which is now out of warranty and service plan, with increased maintenance costs.”

Govender adds that with a longer repayment contract you end up paying more interest.

She suggests vehicle buyers rather consider a maximum repayment term of five years without a residual amount and save first to have a 10-20% lump sum deposit.

Another tip: “If you have equity in your home loan, you can use an access bond to pay cash for the car at the dealership.

“However, make sure that you structure your repayments into the home loan so that you pay off the cost of the car within five years or less.”

Use an access bond to pay cash for a car