Buying a new car is likely to be one of the most significant purchases you’ll ever make. You’re paying for a vehicle with a total cost of several hundred thousand rand, and if you choose to finance your car, you’re also likely to be on the hook for substantial installments every month for the next five or six years.
But we all know there’s nothing quite like that new car smell, so it’s worth it. Besides, once you’ve completed your finance arrangement the car is yours to keep, right?
Well, almost – providing you can pony up for the balloon payment.
What is a balloon payment?
A balloon payment isn’t just a decorating fee for swanky birthday parties. It’s also a way of structuring vehicle finance agreements to make monthly installments more affordable, with a large final payment at the end of the term. For instance, if you buy a vehicle for R400 000, with no down payment and finance it over 72 months, you might have a balloon payment of 20% (R80 000) due at the end of the term.
The benefit of this arrangement is that you get lower installments during the term of the loan, but you still have a large amount owing at the end. And if you haven’t planned for it, this can tip you into the red.
It’s estimated that one in three new cars on the road today are financed using a balloon payment. And because the cost of new vehicles is rising, balloon payments do as well. Since COVID, the average value of the balloon payment has risen from 25% of the vehicle’s value to 37%.
Why do balloon payments catch people off guard?
Even though balloon payments are extremely common, their presence in a finance agreement can still wrongfoot consumers. Consumers are often focused on the affordability of the monthly installment when signing papers, and might not be thinking about the entire term. Also, because the balloon payment falls due in only five or six years, you might forget the details, or your financial position could change.
Finally, many consumers might not understand what they’re signing – especially if it’s their first car.
How much is the balloon payment?
Your balloon payment is calculated according to your vehicle’s purchase price and can be any percentage from 10% to 40%. Many people opt for a balloon payment of between 30% and 40% of the vehicle cost.
Here are some examples:
| Vehicle Price | 30% Balloon Payment | 40% Balloon Payment |
| R250 000 | R75 000 | R100 000 |
| R400 000 | R120 000 | R160 000 |
| R600 000 | R180 000 | R240 000 |
Check your vehicle finance documents or contact your provider to get the exact sum you owe and understand when it’s due.
What happens when the balloon payment is due?
When your balloon payment is due, you have a few options to pay it:
- Settle in cash if you can. This is the lowest-cost option as you can keep your car and settle the debt in full, but it often isn’t possible.
- Refinance the balloon payment. You’ll effectively take out a new loan to cover the balloon payment and have monthly installments.
- Sell or trade in your vehicle. You can use your car’s trade-in value to settle the balloon payment. If the trade-in value is lower than the amount you owe, you’ll have to settle it in full.
If you fail to pay your balloon payment at all, your car could be repossessed.
If you can’t afford your balloon payment
Even if you’ve been anticipating your balloon payment, you might not be able to afford it. If your financial situation has changed since taking out your vehicle finance, or your expenses have increased to the point where your salary is not sufficient, you may qualify for debt review.
If your vehicle is included in debt review, the balloon payment will form part of your overall outstanding balance. It is incorporated into the repayment plan so that you can pay off the full amount you owe with no debt remaining at the end of the process.
If you’re thinking of reaching out to a debt review company, make sure you choose one that is registered with the National Credit Regulator – like Debt Rescue, which has over 15 years experience in supporting consumers to pay off their debt. Contact us today for an obligation free quote.