Balloon Payment - Good or Bad Idea?

[Fern9do]

I think the car I want has a good resale value judging by what the older models are currently going for.
Car in question is a 2007 VW Polo 1.6

 

[superskully]

Here it is plain down.
Never buy with Balloon payment, never.
Why. Cos ask the person calculating your finance or do it uself (Excel - loan amortisation) and see the difference between an installment with and w/o balloon payment.
U will find that they not much different, if u work out the 20k.
Why cos of interest. They charge u double interest on that 20k.
How.
They first charge u interest on on the entire amount of 100k, then the installments of 80k, then high interest on the other 20k as they see this as a loan.
For e.g.
I asked for a quote on a 260k car, 60 months term, 90k balloon and 0k.
90k balloon - 5k pm
0k ballon - 6k pm
1 k difference, for 60 months that 60k savings, but balloon is 90k. So i pay them an EXTRA 30k interest (on top of the normal interest on the 260k). Yep twice.
My advice, if u cannot afford it, dont buy out of yr means.
Rather buy a year older car.
New cars depreciate very fast as well.
Buy maximum 60 months term, never >60.

 

[JK8]

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. (?)

Is it a R20k balloon payment? Thats nothing... take it.

 

[broken1]

Is it a R20k balloon payment? Thats nothing... take it.

I agree.

The problem with residuals is only when people take high residuals, like 50%. You R100 000 car should be worth at least R20 000 in 5 years. So, if you decide to keep the car for the full 5 years - when residual payment time comes, you can sell it for R20 000 settle the bank and go buy another car on finance.

Residuals are a great way to keep monthly expenditure down, while getting maximum benefit. You have to be smart about it though, and use it to your advantage. You need to sit with your bank consultant, and ask them exactly how it works, get the payments with and without residual and consider how long you are going to need the car and make a decision.

Residuals are VERY bad for people who aren't financially savvy and don't know how they work. They buy a R1m car with a 50% residual that they can barely afford. The interest rate increases by 1% and then they need to sell their car in a hurry to downgrade, and can't get enough value out of it. That is when you are loading cars finance, need savings, creating debt etc.

My last 3 cars were financed with residuals. I took a 20% residual out on it. When I wanted a new car 3 years later, the trade offer was more than enough to settle the finance, and used the deposit towards my new car (and lower residual). Now on my 4th car, there is no residual because the trade was high enough over settling the outstanding finance and residual to give me a substantial deposit.

 

[Fazda]

I have bought every one of my cars, since 1995 with a balloon payment, and have not been caught out. All you have to do is make sure that you buy a car with a decent resale value, and then look after the damned thing! It is also quite possible to simply keep going with a new car every 2 to 3 years, as your trade in settles the balloon any way and you are usually left with something over to add as a deposit on the next one.

My only advice is that the car you buy must be something that will hold it's price, like a VW or Toyota. Try it on a Tata or a Citroen and you have your backside burnt!

 

[Ecco]

The way I see it in five years time (looking at a 60 month deal) I will be earning a MUCH better salary..

5 years ago, people may have said the same thing, but today many are retrenched or had to take pay cuts. 5 years ahead is an uncertainty. I would avoid the balloon payment.

 

[Hogrod]

It's interesting to read many people's uninformed opinions about residuals/balloons in this thread. "ooo it's bad idea this, and it's not a good idea that".

Absolute nonsense if you stick to very simple rules.

1. Don't put a deposit on a car where there is a balloon payment
2. Don't make the balloon more than 30%
3. To avoid paying the balloon at the end of the financial lease you must commit yourself to buying a new vehicle every 2/3 years, so that you never pay the balloon. Your trade in value after 2/3 years will easily cover the balloon payment/settlement value of the car.

A balloon lowers your monthly repayment and ensures you can pay a new car every 2/3 years. Think of it as renting a car, where you will never actually own a car, but why would you want to anyway, it's not an asset?

The decision is really if you want a new car every 2/3 years (balloon) or would rather keep and pay off your car (hire purchase and no balloon)

It's a simple calculation, there's no trickery, just use common sense

 

[*SynergyX*]

It's interesting to read many people's uninformed opinions about residuals/balloons in this thread. "ooo it's bad idea this, and it's not a good idea that".

Absolute nonsense if you stick to very simple rules.

1. Don't put a deposit on a car where there is a balloon payment
2. Don't make the balloon more than 30%
3. To avoid paying the balloon at the end of the financial lease you must commit yourself to buying a new vehicle every 2/3 years, so that you never pay the balloon. Your trade in value after 2/3 years will easily cover the balloon payment/settlement value of the car.

A balloon lowers your monthly repayment and ensures you can pay a new car every 2/3 years. Think of it as renting a car, where you will never actually own a car, but why would you want to anyway, it's not an asset?

The decision is really if you want a new car every 2/3 years (balloon) or would rather keep and pay off your car (hire purchase and no balloon)

It's a simple calculation, there's no trickery, just use common sense

and what happens if you happen to write the car off....or damage it bad...you bound to lose out somewhere?? its murphy's law??

 

[Smooth Criminal]

have u seen the price of cars lately?
R100 000 IS a cheap "pre-used"....,cut the crap ,second hand car

Sorry I meant pre-owned

 

[Fazda]

It's interesting to read many people's uninformed opinions about residuals/balloons in this thread. "ooo it's bad idea this, and it's not a good idea that".

Absolute nonsense if you stick to very simple rules.

1. Don't put a deposit on a car where there is a balloon payment
2. Don't make the balloon more than 30%
3. To avoid paying the balloon at the end of the financial lease you must commit yourself to buying a new vehicle every 2/3 years, so that you never pay the balloon. Your trade in value after 2/3 years will easily cover the balloon payment/settlement value of the car.

A balloon lowers your monthly repayment and ensures you can pay a new car every 2/3 years. Think of it as renting a car, where you will never actually own a car, but why would you want to anyway, it's not an asset?

The decision is really if you want a new car every 2/3 years (balloon) or would rather keep and pay off your car (hire purchase and no balloon)

It's a simple calculation, there's no trickery, just use common sense

+ 1000!!

 

[Hogrod]

and what happens if you happen to write the car off....or damage it bad...you bound to lose out somewhere?? its murphy's law??

that's what car insurance is for, and you ensure you have enough cover to cover the settlement value

 

[Hogrod]

I have bought every one of my cars, since 1995 with a balloon payment, and have not been caught out. All you have to do is make sure that you buy a car with a decent resale value, and then look after the damned thing! It is also quite possible to simply keep going with a new car every 2 to 3 years, as your trade in settles the balloon any way and you are usually left with something over to add as a deposit on the next one.

My only advice is that the car you buy must be something that will hold it's price, like a VW or Toyota. Try it on a Tata or a Citroen and you have your backside burnt!

I had a Citroen once and i changed it after 2 years and there was enough value to cover the balloon! But yes pick a car with good resale

 

[Fazda]

that's what car insurance is for, and you ensure you have enough cover to cover the settlement value

EXACTLY!! I always take out extra cover on FULL settlement of the car, and keep that cover until I know that the company will pay what is owed....very simple, costs a small amount up front and is annually renewable, and it covers you for FULL settlement figure, balloon payment or not.

 

[JK8]

It's interesting to read many people's uninformed opinions about residuals/balloons in this thread. "ooo it's bad idea this, and it's not a good idea that".

Absolute nonsense if you stick to very simple rules.

1. Don't put a deposit on a car where there is a balloon payment
2. Don't make the balloon more than 30%
3. To avoid paying the balloon at the end of the financial lease you must commit yourself to buying a new vehicle every 2/3 years, so that you never pay the balloon. Your trade in value after 2/3 years will easily cover the balloon payment/settlement value of the car.

A balloon lowers your monthly repayment and ensures you can pay a new car every 2/3 years. Think of it as renting a car, where you will never actually own a car, but why would you want to anyway, it's not an asset?

The decision is really if you want a new car every 2/3 years (balloon) or would rather keep and pay off your car (hire purchase and no balloon)

It's a simple calculation, there's no trickery, just use common sense

Insurance companies will love you...
Besides, I dont see how throwing money into something without real returns is worth it. 5 years later you still dont have a car.
A car is an asset, thats why banks repo them.

Besides, residual monthly payments are about R500 less than buying to own. (depending on the car and the term)

Its perfect for some people, but if you buying to own, dont do it!

 

[JK8]

that's what car insurance is for, and you ensure you have enough cover to cover the settlement value

Insurance pays you out, you then pay the bank back for something that was never yours.
Think about it, it can go very wrong.

 

[Hogrod]

Insurance pays you out, you then pay the bank back for something that was never yours.
Think about it, it can go very wrong.

Don't agree, the insurance pays the settlement to the bank who own it anyway. And thats the same even with a hire purchase because you don't own the car either until you've made your last payment

 

[Keeper]

I have bought every one of my cars, since 1995 with a balloon payment, and have not been caught out.

This sounds good - aren't you the guy that had like 50 cars? Wow - sounds promising...lets read more on this brilliant technique shall we?

All you have to do is make sure that you buy a car with a decent resale value, and then look after the damned thing! It is also quite possible to simply keep going with a new car every 2 to 3 years, as your trade in settles the balloon any way and you are usually left with something over to add as a deposit on the next one.

And that's why you will keep paying for cars and never own one. :erm:

I don't get it? you've been through how many cars yet at the end of it all, after 20 years you're still paying, and have probably spent over a million bucks, yet don't own squat

stay away IMO

 

[Hogrod]

Insurance companies will love you...
Besides, I dont see how throwing money into something without real returns is worth it. 5 years later you still dont have a car.
A car is an asset, thats why banks repo them.

Besides, residual monthly payments are about R500 less than buying to own. (depending on the car and the term)

Its perfect for some people, but if you buying to own, dont do it!

no, monthly repayments are more than R500 less depending on your balloon percentage and price of vehicle.

Obviously yes, if you plan on owning, don't get a balloon agreement. Common sense.

 

[koeks]

A car is an asset, thats why banks repo them.

hahaha... most cars are not assets but liabilities and expense

banks are simply trying to recover their money by repo-ing the cars and selling them... it's simple business...

 

[Hogrod]

This sounds good - aren't you the guy that had like 50 cars? Wow - sounds promising...lets read more on this brilliant technique shall we?



And that's why you will keep paying for cars and never own one. :erm:

I don't get it? you've been through how many cars yet at the end of it all, after 20 years you're still paying, and have probably spent over a million bucks, yet don't own squat

stay away IMO

Why would i want to own a car? It's not an asset it does not increase in value. You own depreciating asset, whats the point? You're stuck with a 20 year old car, no thanks. Any way its personal preference, you can buy to own, and I'll rent.