Car balloon payments 101!

BMW 1 series. Photo: Motorpress
BMW 1 series. Photo: Motorpress

WHEN it comes to vehicle finance, balloon payment deals are possibly the most commonly misunderstood of all instalment-type options.

“When taken at face value, balloon payment deals may seem like an easy way to drive a car you simply cannot afford. You’re basically taking an amount owed on the purchase price of a car and setting it aside, in turn making monthly instalments lower because they are calculated on a smaller initial debt owed to the bank,” said WesBank’s head of marketing and communication, Lebogang Gaoaketse.

“It is important to remember, however, that the amount set aside at the beginning of the deal is still the buyer’s responsibility and will need to be settled,” Gaoaketse said.

So, what is the benefit associated with balloon payments?

Balloons are designed to help ease the burden of monthly expenses, but the luxury of lower repayments every month does come with a great deal of responsibility for the buyer. When used correctly, the money saved on repayments should more than cover the costs of a loan needed to refinance the lump sum of debt at the end of a balloon term.

Simply put, customers should aim to reserve the money they save every month to make settling the outstanding amount owed on a car easier after years of driving it.

“There is a big difference between being able to afford driving a car and being able to afford owning it,” he said.

“We advise WesBank customers to consider much more than only monthly repayments when calculating vehicle finance affordability. While instalment amounts may seem like the bottom line, other responsibilities such as fuel, insurance, tyres, regular upkeep, unrelated living expenses and in this case balloon payments, that all important lump sum owed also needs to be taken into account when looking at affordability,” said Gaoaketse.

“Extremely responsible budgeting is key to maximising the benefits of a balloon deal. So if you know you might struggle with saving money every month, then this option is probably not the best for you. It’s also important to not see a balloon payment as an alternative to a deposit put down at the start of a loan. A healthy deposit on a new or used car will always make your financial road easier as repayment costs and the deferred balloon debt will be lower.”

WesBank also advises motorists considering balloon deals to familiarise themselves with the term “break-even point”.

This occurs when a financed car’s trade-in value falls in line with the amount still owed to the bank.

Depending on the finance deal structure, a break-even point may come sooner or later during your term, with sooner always being the goal. By nature, balloon payments will push your break-even point to a later date within a loan period.

“Break-even points are important to understand. Drivers have an unhealthy tendency to upgrade their cars and enter new finance deals more often than is financially viable. Rolling outstanding debt into a new purchase or paying off a portion of your old car while driving your new one is a dangerous trap. Irresponsible buyers who do this multiple times cannot only push their break-even point very far out of reach, but in extreme cases can owe the bank an amount that is more than what their asset, or car, will ever be worth. WesBank strongly advises keeping monthly repayments, the value of a current car, and balloon debts evenly balanced,” he said.

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