A short-term gain but a more ex­pen­sive car at the end of your loan term, here’s why a bal­loon pay­ment is a big no-no

True Love - - NEWS - By ZETHU ZULU

Say you’re in­ter­ested in a car that costs about R200 000. If you elect to take a 25% bal­loon pay­ment on the loan, you’ll be pay­ing back only R150 000 over five years. This means your in­stal­ment will be lower. But, when that ini­tial loan term ends, you’ll still owe the 25%, which works out to R50 000.

“Re­mem­ber, hav­ing a bal­loon pay­ment means you have an ad­di­tional debt which you are not pay­ing off, but you’re pay­ing in­ter­est on it over the full loan term,” mo­tor­ing web­site Drive It, ex­plains.

Head of 1st for Women In­surance Seugnette van Wyn­gaard helps us un­der­stand the tech­ni­cal­i­ties of bal­loon pay­ments:

What is a bal­loon pay­ment?

It’s a lump sum that’s due to a fi­nancier, e.g. the bank, at the end of a loan term. This al­lows you to pay only a por­tion of the price of a car. The re­main­ing amount is due at the end of that ini­tial loan term. It can be paid off in cash or re­fi­nanced, sub­ject to credit ap­proval. What bal­loon pay­ments do is lower your monthly car re­pay­ments. But, you only be­come the owner of the car once the ini­tial loan amount and the resid­ual value has been set­tled.

How do banks de­ter­mine who qual­i­fies for this pay­ment op­tion?

Stan­dard in­stal­ment sales, bal­loon pur­chases, as well as leases are sub­ject to you meet­ing the af­ford­abil­ity cri­te­ria. Although cer­tain fi­nanciers are will­ing to as­sist those with a less than ideal credit score, a good credit score will not only help you to se­cure a loan more eas­ily, but also to do so at a more favourable in­ter­est rate.

Why are bal­loon pay­ments dis­cour­aged?

You end up pay­ing sig­nif­i­cantly more for the same car due to in­ter­est charges. If you want to own the car, you’ll be­come re­spon­si­ble for the resid­ual amount at the end of your loan agree­ment. Re­fi­nanc­ing this amount will in­cur ad­di­tional charges and even more in­ter­est. It’s def­i­nitely not an ideal sit­u­a­tion.

How can you avoid a resid­ual pay­ment al­to­gether?

‘Buy what you can af­ford and rather pay a de­posit than a bal­loon pay­ment’ is a good rule of thumb. Pur­chase a car you can af­ford through a nor­mal in­stal­ment sale. Sav­ing up a healthy de­posit and struc­tur­ing your re­pay­ments over a shorter term could save you thou­sands of rands. There’s no way to re­ally “avoid” a bal­loon pay­ment once an agree­ment with a fi­nancier is in place. Bal­loon pay­ments can be paid off early even though a penalty fee may ap­ply, but it’s best to read your con­tract for any re­stric­tions.

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