Buying a car is usually one of the bigger financial commitments you’ll take on in your lifetime. Whether you’re in the market for a new model or intend to approach a used-car dealer for a good used model. The main step in the car-buying process is figuring out how you’re going to pay for it. With the year-on-year increase in car prices, many potential buyers find that Vehicle Financing is the only way they’ll be able to afford their dream car.
When financing a new set of wheels, buyers can choose to attach a balloon payment or residual to the loan, and what the amount will be. Including a balloon payment in the repayment plan has an impact on how much the monthly instalment will be, and how much the car buyer ends up paying for the vehicle.
Balloon/ residual payment plans are becoming more common among car buyers in South Africa. Wesbank reports on average one in every five funding agreements now includes a balloon payment that comprises on average around 17% of the finance amount. If you are considering making use of a balloon payment or residual, here are some things you should know before signing the loan agreement.
A balloon payment on a car loan allows the borrower to settle an inflated lump sum at the end of the repayment period, with interest having been accrued up until then on the balloon amount. Rather than extending the repayment on the total cost of the vehicle over the average six-year period, the borrower and the bank agree that a certain percentage be pushed to the end of the finance term.
This will keep the monthly instalment amount lower but when it’s time to settle the balloon/ residual payment, it needs to be paid as a single payment. If the buyer is unable to clear their debt on the balloon payment, they may need to sell the car.
A balloon payment is best explained by this example from Wesbank (via Engineering News): “A balloon payment of 20% on a vehicle of R240 000 will result in monthly repayments of R4 739.58 (over 60 months, at 11.5% interest). At the end of the finance term, the repayments will total R284 374.84. However, the buyer will still owe a 20% balloon payment – or R48 000 – thus bringing the total price of the vehicle to R332 374.84.”
The bank will demand evidence that you will be able to afford a future balloon payment. That’s why financial commitment and planning for that due date is key to manage a balloon payment plan. If you’re someone who saves money clients steer clear of balloon payments since it may seem an attractive option at first, but for a future time of need and won’t mind withdrawing from your savings when the due date arrives, then a balloon payment may be the solution for you.
Vehicle and asset finance providers, the Banks, however, advises that will only boil down to increased debt in the long run.
Balloon payments and residuals can be confusing and overwhelming to clients, therefore, it’s important to know everything about this loan repayment structure. Below are some of the advantages and disadvantages to help you decide whether they will work for you.
In simple terms, instead of spreading the full vehicle price over a normal finance period like four or five years, you defer a percentage, say 30%, of that lump sum to the end of your finance period.
This then allows for a much lower monthly instalment during the normal finance period, but you still face the 30% ‘balloon’ payment (residual value) at the end of the loan term. You will have to pay in the outstanding lump sum by paying cash or selling the car!
Autofin Assist will help you with a cash loan in order to help you to pay the outstanding balloon payment to the bank and will arrange affordable and low interest rate repayment for you over 4, 5, or 6 years.
Autofin assist will help you not to lose your car over the outstanding balloon payment due to the bank. We will correspond with the bank on your behalf in order for them to know that we are busy helping you with the settlement in order for you not to lose your dream car.
Please note Autofin assist will not at any time take your car from you or take ownership of your car, you will stay the owner of your car and the car will stay with you. We do not pawn cars or take ownership of your car at any time. We are here to help you and not to take your car.
DISCLAIMER: The content of this article is for informational purposes only and should not be considered as financial advice. Readers are encouraged to consult a financial adviser with any questions or concerns they have regarding their personal finances.