Statistics record that about one out of every five finance deals on motor vehicles in South Africa includes the so-called “balloon payment” option. The following article points out the benefits and pitfalls of this financing scheme.
ByStuart Johnston
Published: 5 February 2024, 08:22
Estimated Reading Time: 3 minutes
What is a balloon payment? In short, a balloon payment is the same as paying a deposit on a motor vehicle, but with one very important difference: A deposit is paid by the vehicle buyer upfront, while a balloon payment is paid at the end of the finance period.
Related:The pros and cons of a balloon payment
Perhaps selling your current car to have a deposit might be better. You can sell your car quickly and easily with our Instant Offer tool here before you search for new or used models on AutoTrader. But now, let us find out if a balloon payment is a good option for you.
What’s the advantage of a balloon payment?
The advantage of this to you, the buyer, is that it enables you to buy a car you wouldn’t be able to afford immediately without requiring a sizeable deposit upfront.
How is a balloon payment structured?
Typically, a balloon payment would represent a percentage of the purchase price of the vehicle. For example, for a car costing R300000, a 20% balloon payment would work out at R60000. This would be paid in one lump sum at the end of the contract period – for example, 60 months or five years after purchase.
Related: AutoTrader's Car Buying Glossary of Terms
Is the balloon payment amount also subject to interest?
Yes. No bank or finance house will lend you R60000 for zero interest!
So is my balloon settlement payment going to be much larger than R60000?
No! And there’s a good reason for this. The interest you pay each month, as a percentage of your monthly instalment, is not calculated on R240000 but on the full R300000 the bank lent you to pay for the car. So you are paying interest on R300000.
So, how does a balloon payment reduce my monthly instalment?
The monthly repayment is structured so you pay off part of the principal part of the loan and part of the interest each month. Your repayment with a balloon loan will be calculated so that you pay off a portion of the principal calculated on R240000. But the interest you pay monthly is calculated on the full amount of R300000.
Your monthly repayment amount is lower. But not as low if you were only paying interest on R240000.
This means you are paying considerably more interest over the five years than if you had opted for a straight instalment finance scheme. This is because you are not reducing that additional borrowed amount of R60000 over five years.
Related: How to negotiate when buying a car
Apart from the extra interest, what are the other “dread factors” with a balloon payment?
Interestingly, while the biggest motor vehicle financing company in South Africa, Wesbank offers balloon payment financing (along with most finance houses), it recommends that customers opt for a straight vehicle financing scheme, which would traditionally include a 10 % deposit, with the balance of the car’s purchase price financed. WesBank also advises opting for the shortest repayment period possible for the customer.
Related: What's a good interest rate on a car loan in South Africa?
Your car may not have enough residual value to settle the balloon payment after five years.
New cars lose value at an alarming rate, and there have been cases where at the end of a five-year or six-year contract, the car financed with a balloon payment may not have enough residual (resale) value to enable a customer to settle the balloon payment.
Another factor is fiscal discipline. If a customer has not had the financial discipline to save for a deposit upfront, there is a good chance that he or she won’t have put aside enough money to make that balloon payment.
