Data from financial services company, Wesbank, shows an alarming increase in balloon vehicle payments in South Africa.
A balloon payment is a way to shift a percentage of the car loan to the end of the loan agreement, notes SuperGroup.
This enables you to have lower monthly installments because your monthly payment is calculated on the loan amount minus the balloon amount. Once you get to the end of your new car finance agreement you will then either have to settle the final balloon amount, refinance the balloon amount or sell the vehicle to settle the balloon amount.
Rudolf Mahoney, head of research at WesBank, told BusinessTech that 28% of deals signed with Wesbank include balloon payments.
This is up from 19.4% of deals in October last year.
“The average balloon payment is 30% of the vehicle’s purchase price. This is up from 28% in October last year,” Mahoney said.
Standard Bank vehicle and asset finance division noted in Business Day, that since the beginning of 2012, the proportion of vehicle finance applications involving balloon payments had risen from 8.9% to 14.6% in 2014.
While balloon payments may make it possible for South Africans to buy the car of their dreams that they would not otherwise have been able to afford, the sting lies in the tail.
Neil Roets, CEO of debt management company, Debt Rescue, cautions against such an agreement.
“For reasons that I have never been able to fathom, consumers think that by some magic trick they will have the money to settle the balloon payment at the end of the term even though they have no reasonable expectations that this will be the case.
“The reality is very different and the overwhelming majority fall far short of the outstanding amount and are suddenly plunged into debt.”
“We are seeing more and more of these cases coming to us asking for help because suddenly they can’t afford school fees and the host of other payments such as credit cards and store cards that suck up the bulk of their income.”
Roets questioned whether South Africans are financially educated enough to understand the pitfalls of balloon payments.
“The bottom line is that South African consumers are very poorly educated when it comes to financial matters and both the state and the education system should become involved in a concerted effort to ensure that they are better informed about their options and the consequences of their actions,” Roets said.
WesBank urges consumers to maintain a monthly budget and ensure that their accounts always have enough money for instalments.
Vehicle Finance Agreements that include a Balloon Payment
Example: Balloon payments
If you buy a R200,000 vehicle on a 72 month finance term at a 10% interest rate, then your total vehicle finance amount will be R266,722.24 or R3,705.17 per month, notes SuperGroup.
If you buy that same vehicle at a 10% interest rate over 72 months but with a 30% balloon payment, then the monthly installment will be R3,093.62 but you will still owe R60,000 at the end of the 72 month period.
The Finance term of your car loan agreement
The vehicle finance term is the period of time over which you will pay back the car loan. In South Africa the car finance terms usually range between 12 and 72 months. The longer the vehicle finance term the smaller the monthly installments.
SuperGroup warns that vehicle owners will pay more interest on longer car finance terms.
Example: Finance terms
If you finance a vehicle of R200,000 over a period of 60 months at a 10% interest rate, then your total finance amount will be R254,964.60 or R4,249.41 per month.
If you finance that same car but over a longer period of 72 months at a 10% interest rate, then your total finance amount will be R266,722.24 or R3,705.17 per month.