Don’t get caught! Look out for these balloon payment traps when buying a car

When it comes to buying a car and eventually financing it, most South Africans have no idea what a balloon payment entails.

This is the view of WesBank Vehicle Finance, who stated that while the inherent low price appears attractive, it should be carefully studied before a signature is scribbled into the dotted-line.

Be careful…

“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.”

Even with the benefits

Despite the caution, balloon payments do have advantages, but only when used correctly as its main buyer incentive, lower repayments, should not be seen as an extra amount now deemed spendable.

“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,” Gaoaketse continues.

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“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 one 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 an easier one to travel, as repayment costs and the deferred balloon debt will be lower.”

Breaking even

She also advised that buyers considering a balloon payment should pay particular attention to what is known as a breakeven point that will be obtained at a later stage due to the nature of the balloon structure.

“South Africans have an unhealthy tendency to upgrade their vehicles and enter new finance deals more often than is financially viable. Rolling outstanding debt into a new purchase, or in other words, paying off a portion of your old car while driving your new one is a dangerous trap to fall into,” Gaoaketse says.

“Irresponsible buyers who do this multiple times can not 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.”

For more information, visit wesbank.co.za, or to find out more about balloon payment, click here.