Balloon Payment - Good or Bad Idea?

[Fern9do]

INteresting to read the differing opinions on this matter. Most people I speak to don't really seem to understand this whole baloon payment/ residual process.

Stupid question maybe but can somebody explain how it works when you sell a car that actually belongs to the bank?
Do you or the bank decide on a price for it? Do you sell it to a dealership?
Also after selling the car, does the change(if theres any) go to you? .fFor example you owe the bank R50k and sell it for R70k.

 

[Hogrod]

INteresting to read the differing opinions on this matter. Most people I speak to doesn't really seem to understand this whole baloon payment/ residual process.

Stupid question maybe but can somebody explain how it works when you sell a car that actually belongs to the bank?
Do you or the bank decide on a price for it? Do you sell it to a dealership?
Also after selling the car, does the change(if theres any) go to you? .fFor example you owe the bank R50k and sell it for R70k.

You phone Absa for example, ask for the settlement price. Then go the dealer where you want a new car, they will then tell you how much they'll give you for the trade in. If the trade in value is enough to cover the settlement then sell.

The dealership buys the car and pays the bank directly. You don't do a damn thing

 

[JK8]

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

Obviously depending on the insurance.
Most insurance companies offer an additional payment to your premium to cover additional costs owed to the bank.
The common way insurance companies payout is they "buy" the car from you at the retail price, you settle the bank or replace your car.
If you have an outstanding balloon payment, you in trouble.
Insurance companies dont cover the balloon payment unless specified.

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.

Ofcourse the longer the term you choose to finance the car the cheaper your monthly payments. HP for 5 years and residual at 5 years are within R500 - R1000 difference.

People just want nice cars and residual is there to entice them whether they can afford it or not.

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...

They assets.
If you buy a couch and cant pay it, do the banks take it back? Nope they increase the interest till you pay it back!!!

Yes cars depreciate but why spend R100k over 5 years and then sit with nothing after that, where as if you pay R100k you still can sell it for R50k, that means you atleast had R50k use of the vehicle instead of a R100k loss!

 

[JK8]

Another idea is, if you dont have the money for the balloon payment now dont buy the car.
If you have the money for the balloon payment, throw it in a low risk investment account so when it comes time to pay it, you could have made some cash.

 

[davemc]

Hu? Nope, banks do take couches back, and they will add TV's and cars to the list in an attempt to recover the monies you owe them.

 

[Keeper]

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.

I know a car is not an asset, but look at it this way.

you are basically "borrowing" the car - almost like one does at AVIS, because you sit with NOTHING at the end.

I say, pay off that Golf or whatever properly, and at least get 100k out of it when you sell it.

use as deposit for a more expensive Merc - and pay that off properly too. sell it for more than the golf.

rinse and repeat.

at the end of 10 years you have nothing, and i'll have a nice jaguar or something to sell - because I actually OWN it.

 

[Smooth Criminal]

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.

A well maintained 10 year old car can save you more than having to drive a new car every 2-3 years.

Did you calculate the savings of owning a car that's paid off? Suppose your monthly installments are R4000 and you pay it off in 5 years, you'd save close on R50 000 a year on car repayments. If you do that for 5 years, you'd save R250 000. Then you're sitting with a 10 year old car which, if reliable you can keep, or you can sell it for half (or even slightly less) your purchase price, assuming that you bought a car with a decent resale value. Whatever you'd have saved up (plus what you sold the car for) can be a pretty substantial deposit towards your next car, even if you don't use the full amount. This will lower your monthly premiums, allowing you to save even more.

You only need to own a car once - after that you can repeat the cycle and choose to own again and save more. Or from there on you can sell every 2-3 years if you prefer and get a new one. The difference is that there's virtually no risk involved this way as the amount that you would have saved up and piled into the deposit would compensate for the need to have a balloon payment.

edit: having an asset to your name (be it depreciating or not) doesn't hurt your affordability criteria either. And it's always something that can be used as collateral.

 

[Hogrod]

Obviously depending on the insurance.
Most insurance companies offer an additional payment to your premium to cover additional costs owed to the bank.
The common way insurance companies payout is they "buy" the car from you at the retail price, you settle the bank or replace your car.
If you have an outstanding balloon payment, you in trouble.
Insurance companies dont cover the balloon payment unless specified.



Ofcourse the longer the term you choose to finance the car the cheaper your monthly payments. HP for 5 years and residual at 5 years are within R500 - R1000 difference.

People just want nice cars and residual is there to entice them whether they can afford it or not.



They assets.
If you buy a couch and cant pay it, do the banks take it back? Nope they increase the interest till you pay it back!!!

Yes cars depreciate but why spend R100k over 5 years and then sit with nothing after that, where as if you pay R100k you still can sell it for R50k, that means you atleast had R50k use of the vehicle instead of a R100k loss!

I agree with your insurance comments, I do cover over and above for protection and sanity, and we all should so that we don't suffer if a car is written off.

If you have a balloon you do not pay a car off over 5 years. That's just dumb. 2/3 years max. If you're going for 5 years then yes don't do a balloon! That's where ppl make mistakes.

Look I don't think of a car as something I'm going to make money from. I pay for it because I need it to function. Like renting a flat, you get nothing out of it at the end, but you're paying for the use of the item. I can't be stuffed with paying 5 years or more for a car that's getting old. I'd rather have new and not worry about anything else because that's my choice.

 

[Hogrod]

A well maintained 10 year old car can save you more than having to drive a new car every 2-3 years.

Did you calculate the savings of owning a car that's paid off? Suppose your monthly installments are R4000 and you pay it off in 5 years, you'd save close on R50 000 a year on car repayments. If you do that for 5 years, you'd save R250 000. Then you're sitting with a 10 year old car which, if reliable you can keep, or you can sell it for half (or even slightly less) your purchase price, assuming that you bought a car with a decent resale value. Whatever you'd have saved up (plus what you sold the car for) can be a pretty substantial deposit towards your next car, even if you don't use the full amount. This will lower your monthly premiums, allowing you to save even more.

You only need to own a car once - after that you can repeat the cycle and choose to own again and save more. Or from there on you can sell every 2-3 years if you prefer and get a new one. The difference is that there's virtually no risk involved this way as the amount that you would have saved up and piled into the deposit would compensate for the need to have a balloon payment.

There's absolutely nothing wrong with your logic, the whole thing is personal preference.

Like I said some ppl don't want to keep a 10 year old car, I don't. And they can afford to get new every few years. It's a personal preference.

 

[Keeper]

I'm just saying - it's like you buying a TV, paying R7000 out of the 10k Original Price, and selling it to a pawn shop for R3000 so you don't have to pay it anymore.

Except, you're not only losing a 10k TV - you are losing a 150k Car :erm:

 

[superskully]

As i mentioned, there is something that is forgotten.
Interest.
Why pay the bank added interest with a residual (as i have mentioned, that balloon payment is taken as a loan on top of the interest u would pay on the full amount).
Just buy a yr older car.
In 5 years u will be earning more, but dont forget inflation, cars will also cost more and u will be left with the same prob again.
In 5 yrs, u may want to buy a house, start a family...
That was my mistake (not relevant to the baloon argument as it was a house which i dont live in cos i got married and had to relocate... there is a point - dont plan 5 yr ahead, especially on a car).

 

[Hogrod]

I'm just saying - it's like you buying a TV, paying R7000 out of the 10k Original Price, and selling it to a pawn shop for R3000 so you don't have to pay it anymore.

Except, you're not only losing a 10k TV - you are losing a 150k Car :erm:

It's really hard to explain, I see it as a means to an end. Yes I could buy a citigolf and keep it for a long time. But my outlook is you only live once, and as long as your finances and retirement are in good shape, then follow your passion and spend money where you want to, whether its holidays, cars or beer

 

[Keeper]

It's really hard to explain, I see it as a means to an end. Yes I could buy a citigolf and keep it for a long time. But my outlook is you only live once, and as long as your finances and retirement are in good shape, then follow your passion and spend money where you want to, whether its holidays, cars or beer

My Aunt lives like that.... always drove fast cares and lived in fancy houses, renting.

she's almost 60 now and owns nothing.

 

[Hogrod]

My Aunt lives like that.... always drove fast cares and lived in fancy houses, renting.

she's almost 60 now and owns nothing.

Sorry to hear that. It's a huge problem and people need to get themselves a financial adviser so they can plan adequately ahead.
Only once that's done should they think about what they can do with any spare cash.

Unfortunately, the majority of people don't have enough saved for retirement because they spent everything on items they could not really afford to buy in the first place.

 

[Keeper]

Unfortunately, the majority of people don't have enough saved for retirement because they spent everything on items they could not really afford to buy in the first place.

shockingly true

 

[ALFAHOLIC]

I would say, if you plan on payment car payments for some time, do it. When it comes to the end of your term, and you have the 20k left for baloon payment, you just trade the car for another car, and the 20k difference gets deducted...

ALMOST ALL VW's are sold like this in KBY, so I'm told my DP!

 

[HapticSimian]

Why pay the bank added interest with a residual (as i have mentioned, that balloon payment is taken as a loan on top of the interest u would pay on the full amount).

Not quite. You pay interest for the full period on the full cost of the loan, not ADDITIONAL interest on the balloon payment.

My rule of thumb: Only consider a balloon payment if you could afford the full instalment WITHOUT a residual amount. Don't use a balloon payment to buy an otherwise unaffordable car. It's a recipe for disaster.

 

[ALFAHOLIC]

Lemme give examples...

The bank is a bloody blood sucking beast. I started work here in Jan, and I earn more than my friend does, based on his payslip - BMW and the BANK allowed this ou to get a 1 Series...5k + insurance of about 1.5k...joh!

Another story, dude gets way less than most and buys a Polo 1.9 Tdi...4k + insurance...eish.

girl I work with bought a GTi...we get roughly the same nett...G5GTI 6k+ insurance...eish

I have the salary scales as I know a friend of a friend who knows a friend...shocking!

Shocking thing is, these people have no curtains in their flats!

 

[Hogrod]

Lemme give examples...

The bank is a bloody blood sucking beast. I started work here in Jan, and I earn more than my friend does, based on his payslip - BMW and the BANK allowed this ou to get a 1 Series...5k + insurance of about 1.5k...joh!

Another story, dude gets way less than most and buys a Polo 1.9 Tdi...4k + insurance...eish.

girl I work with bought a GTi...we get roughly the same nett...G5GTI 6k+ insurance...eish

I have the salary scales as I know a friend of a friend who knows a friend...shocking!

Shocking thing is, these people have no curtains in their flats!

It happens because they live for today rather than planning for tomorrow. Most of these people will get a nasty shock at the end of their car leases, unless they know what they're doing. So feel better knowing that.

It does shock me the number of premium cars are on the road. But places like BMW and Mercedes have guaranteed buy backs on your BMW/Merc (so they give you a balloon automatically), meaning you will drive a new car every few years for the rest of your life.

That's how I think most of the population who drive a 3 series or C class can afford to do so

 

[Smooth Criminal]

Shocking thing is, these people have no curtains in their flats!

Why is it shocking? There are plenty of people who live above their means and buy a car where the installment is the maximum amount they qualify for. Even more so if they take a residual just to be able to afford a car. If there's one thing about people, it's that if they have their mind set on something then it's very difficult for them to change it. "I want that S3, even if it means that I have no furniture and I need to take a residual".