Balloon Payment - Good or Bad Idea?

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Fern9do

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Do you guys think that it's a good idea to buy a car with a balloon payment?
I'm considering doing this because I want lower monthly repayments. Nothing hectic though, probably only R20 000 (20%)

Good Advice will be appreciated:p
 
bad idea!!!!!!!!!!!!!!!!!

heard on etv tonight; that why saa don't have 747's anymore, balloon payment.
 
If you've got a truck load of cash saved up in a piggy bank for a "rainy day"... then yes, why not. :D

Personally I wouldn't do it. Unless you're really loaded, you never know what you may need that extra cash for when the time comes for the "balloon" payment.
 
The way I see it in five years time (looking at a 60 month deal) I will be earning a MUCH better salary..

Most people I've ask say no, but I have to wonder how some guys can afford to drive these fancy new cars without using a balloon payment.

Worst case scenario I can refinance the R20 000. (?)
 
Sometimes it's the only option to get a decent (not extravagant) car that'll go the distance. You can refinance it. Most likely, you can start increasing your car payments, then refinance the residual so you pay it over the same period anyway.
 
Let me explain my pov of a balloon payment. You only use one if you plan on getting a new car every 2-3 years. You don't want to get a balloon payment if you plan on taking ownership of the car, say after 60 months

A balloon payment will lower your monthly repayments, you take a financial lease over 60 months but after 24-36 months you need to think about trading it in for a new car. The trade in value will be enough to cover the outstanding balloon payment.
This is how you avoid paying the balloon.

You can settle early on any financial lease or hire purchase with any bank with no penalty.

By using a balloon payment you pay less per month compared to a normal hire purchase. But you commit yourself to upgrading your model every few years so to avoid paying the balloon

Don't take a balloon greater than 30% and don't buy a model with poor resale value. Also don't pay a deposit on any new vehicle finance agreement when taking a balloon since you don't want to dump extra money into a vehicle you don't plan on keeping for a more than 2/3 years
 
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andytl5 said:
Let me explain my pov of a balloon payment. You only use one if you plan on getting a new car every 2-3 years. You don't want to get a balloon payment if you plan on taking ownership of the car, say after 60 months

A balloon payment will lower your monthly repayments, you take a financial lease over 60 months but after 24-36 months you need to think about trading it in for a new car. The trade in value will be enough to cover the outstanding balloon payment.
This is how you avoid paying the balloon.

You can settle early on any financial lease or hire purchase with any bank with no penalty.

By using a balloon payment you pay less per month compared to a normal hire purchase. But you commit yourself to upgrading your model every few years so to avoid paying the balloon

Don't take a balloon greater than 30% and don't buy a model with poor resale value. Also don't pay a deposit on any new vehicle finance agreement when taking a balloon since you don't want to dump extra money into a vehicle you don't plan on keeping for a more than 2/3 years
Click to expand...

Hmm interesting. let's see if I understand this process...

Okay, let's say I buy a car for R100 000 (which is what I'm planning to do), I pay it off for three years and now I'm left with say R30 000 to pay + the R20 000 Balloon payment.
So basically I owe the bank R50 000, which means that if I sell the car for R70 000 I will actually have R20 000 to put down on the next car. Is my reasoning correct?

And also how do you sell a car that technically belongs to the bank?
 
A balloon payment is simply the final, once off,memorable screwing you get by the bank and car dealer after the preceding two to three years of foreplay (in which you made your monthly payments.)
 
tco21 said:
Still don't understand the concept. I thought a balloon payment is like a deposit?
Click to expand...

Its like a deposit you have to pay at the end.

Like if the car costs 100 000 and you put down a deposit of 20 000, that means the finance amount will be 80 000

If you finance that amount over 60 months with a 10% interest rate you monthly repayment will be R1699.76
If you choose to take a balloon amount of say 25%, that means that your monthly repayments will be R 1441.49 per month BUT after 60 months you will still owe R20 000 on the car. If you want to get a new car then you will have to load the new car with the R20 000, ie if the new car is going to cost you R100 000 then you will have to finance R120 000 on a car that is only worth R100 000.
A residual can get you in to some debt... its ok to take one but just make sure you have the money at the end of the finance period. What you can to is increase your payments as you earn more, this might even help you pay of your car faster.
 
Fern9do said:
Most people I've ask say no, but I have to wonder how some guys can afford to drive these fancy new cars without using a balloon payment.
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Because they still stay at home with their moms.

Generally it's a bad idea, unless you know for certain that you'll have the R20000 saved up. I have to ask though, financing the R20000 is only ~R500 per month more - how much is the car that you're looking to purchase? If you're looking at a residual because you don't qualify for finance on the car, then you're spending too much on it anyway. IMO you should never purchase for your maximum qualifying amount. Rather get something cheaper now, and upgrade when you start earning more in 5 years.
 
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hmmm. The car costs R100 000 and without a baloon payment it comes down to about R2000 a month, which if you add insurance (R600-R700) it'l be about R2600. Which is R600 more than what I can afford at the moment.
 
Fern9do said:
hmmm. The car costs R100 000 and without a baloon payment it comes down to about R2000 a month, which if you add insurance (R600-R700) it'l be about R2600. Which is R600 more than what I can afford at the moment.
Click to expand...

In these times its not a good idea to get a car that you can just afford... you have to allow for things to get worse, also do you have a fixed interest rate ? If not the remember that as the rate goes up you will have to pay more.

I got a residual so that I could afford my car... it wasn't the best idea.
 
It may not be what you want to hear but I'd have to suggest getting a cheap pre-used car. You have to budget for insurance, particularly if you're under 25. Stick it out for a year or two and trade it in for a deposit on another car when you're earning more.
 
have u seen the price of cars lately?
R100 000 IS a cheap "pre-used"....,cut the crap ,second hand car
 
don't take the balloon option... it's very bad. people often think they can save up the money and they never do. and also if you can afford a R100k car get a R75k car and save a little:D remember affording a car is not only affording to pay the installment, maintenance, insurance, fuel, service, etc...
 
Problem is thaat you cant buy a decent pre-owned car for R75k. Except for CitiGolfs, but thats not decent imo.
 
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Balloon payment / residual was invented by clever people who found a way to make an expensive product look cheaper. It works when the expensive product has a good resale value. It fails miserably if the resale value plunges.
 
When my wife started working a few years ago, she couldn't afford the monthly payment on her new car. So, she decided on a balloon payment / residual to lower the monthly premiums. I can now vouch that it was the worst idea ever. Her payment period for the car lapses in 2 months. We were lucky enough to receive a generous lump-sum of money last month and decided to use that money to settle the car completely. If it weren't for this blessing, we would've had to refinance the residual amount.

Stay away from balloon payments.
 
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