What is that balloon payment in your contract?

You need a new car, and an advert promises an affordable monthly payment. But when you read the fine print at the end of the contract, it refers to a balloon payment.

“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,” says Lebogang Gaoaketse, WesBank’s head of marketing and communication.

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

So what is the benefit associated with balloon payments?

It is designed to lower monthly payments, and consumers should aim to reserve the money they save on the monthly instalment to pay that end-of-contract balloon payment.

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

“We advise 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 the case of balloon payments, that all-important lump sum owed also need to be taken into account when looking at affordability.

Best still is to save money for a healthy deposit on your new or pre-owned car.

It is also important for consumers to ensure that they understand the term ‘breakeven point’. By nature, balloon payments will push your breakeven point to a later date within a loan period.

Source: MotorPress