Balloon Payment - Good or Bad Idea?

[Budza]

Phew! Interesting read. Gotta say, I agree with the whole "live within your means" thing. I'd prefer more beer, skiing holidays or whatever to driving a fancy car.

All those okes cruising around in expensive cars (and, someone said, living with their mothers ) are definately judged. (or, have no curtains in their own houses...)

To continue someone's sig: "Have more than thou showest, Speak less than thou knowest, Lend less than thou owest" Good motto that

 

[Hogrod]

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".

Lol, so true. On my street there's a guy with a Toyota Land cruiser, and I promise you that costs more than the bond repayment on the house he lives in (probably renting the place anyway), the car looks bigger than the house!

 

[ALFAHOLIC]

Lol, so true. On my street there's a guy with a Toyota Land cruiser, and I promise you that costs more than the bond repayment on the house he lives in (probably renting the place anyway), the car looks bigger than the house!

LOL - at my sister's work the lawyer has an A3 turbo...he lives behind someone else's house in a servants courter...JOH!

 

[Keeper]

LOL - at my sister's work the lawyer has an A3 turbo...he lives behind someone else's house in a servants courter...JOH!

easy to pick girls up, hard to take them home

 

[ALFAHOLIC]

My wife always says it like this...if you can't afford it CASH...then you simply cannot afford it!!!

I know its sad to think and its demeaning and its a stupid way of living, but we need to stop thinking of the NOW and start thinking of the future...racking up stacks is better than paying your cash away on things you wanted 4 months ago but still pay off now!

I can buy a new wheel package cash if I wanted too, but there are just too many other things that will suffer in the meen time...I have absolutely NO credit, only my rent and my car and my wifey's car...that's all we have...yes, some people live nicer than we do, it took us 8 months just to get a decent Plasma 42" on Monday...I was proud to own that thing, same with all other expensive furniture in my flat...we planning on buying a house in Jan, this too will set us back somewhat, but paying off my own house is way better than paying off someone else's bond.

With cars its another story, we all have dream cars, the fact that we can afford it monthly is a good thing, but the catch comes in after a year or two when you get duk of the car and now trade it, and so the cycle continues...you'll never own a car, only rent it, coz that's what I"m doing, I'm renting the car every month.

Now I know this is something no one wants to hear but its the honest brutal truth...we want things now and we will go get loans, we'll use credit cards when we shouldn't, we'll draw savings...coz that's just who we are...

ALOT of people struggle with debt month to month...can't even go on holiday as they live to pay off debt...ever heard of the people who use credit cards to pay off other credit cards???

 

[FarligOpptreden]

<snip>but paying off my own house is way better than paying off someone else's bond.</snip>

That is absolutely, positively... true. We bought our first "accommodation" back in Feb 2007 - a small 75sqm, 3rd floor apartment. When we grew tired of space restrictions 18 months later, we tested the market for a sale. We got a very quick response from buyers and made a sizable profit on the place. We made the mistake of signing a lease agreement for 12 months whilst looking for a new place to buy. We got out of the agreement 8 months later and I can happily say that we bought our new 175sqm, free-standing home. The fact that we could settle my wife's car payments (including a 30% residual) was an absolute blessing and we would've struggled to afford the bond on the house if we still had to pay off her car.

Bottom line? We have 3 sources of debt:
- Our house
- My car (with NO residual )
- Credit card (which is a volatile source of credit, settled every month )

We now have more money to spend on furnishing the house and spending on gifts and entertainment over weekends. I can advise anyone to not get involved in too much debt - especially residuals on cars!

 

[superskully]

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.

I dont beleive it. As u say, u pay the interest on the full amount. Then, the balloon payment is taken as a loan. That interest portion is added to the installment. So u pay double interest on the balloon payment.

So thats what happened when i asked 2 years ago, not sure if things have changed now.
But then, everybody would buy on Balloon. Cos if i a single interest, i rather take the baloon, and take the extra savings and invest it somewhere.
Do the maths.
My Math (2 yrs ago), was that on a balloon payment of 90k on 260k car, 60 mths, i saved 1k pm on installment - which gives 60k, yet i owe 90k - so that 30k on interest additional.

 

[HapticSimian]

I dont beleive it. As u say, u pay the interest on the full amount. Then, the balloon payment is taken as a loan. That interest portion is added to the installment. So u pay double interest on the balloon payment.

So thats what happened when i asked 2 years ago, not sure if things have changed now.
But then, everybody would buy on Balloon. Cos if i a single interest, i rather take the baloon, and take the extra savings and invest it somewhere.
Do the maths.
My Math (2 yrs ago), was that on a balloon payment of 90k on 260k car, 60 mths, i saved 1k pm on installment - which gives 60k, yet i owe 90k - so that 30k on interest additional.

OK, simple example: You finance a R200k car with a 25% (R50k) balloon payment after 60 months.

In 60 months you pay off 75% of the capital debt, plus the interest on the full purchase price. Thus, in the end you owe R50k total after having paid interest on it for 5 years as part of your loan. There is no ADDITIONAL interest on the R50k. You can now, after the 5 years, refinance the R50k which will obviously incur further interest.

The danger of this type of loan is that you run the risk of ending up with a car that is worth less than what you owe, either through not looking after the car, racking up high mileage or smacking it against a wall - or a combination thereof.

 

[ALFAHOLIC]

That is absolutely, positively... true. We bought our first "accommodation" back in Feb 2007 - a small 75sqm, 3rd floor apartment. When we grew tired of space restrictions 18 months later, we tested the market for a sale. We got a very quick response from buyers and made a sizable profit on the place. We made the mistake of signing a lease agreement for 12 months whilst looking for a new place to buy. We got out of the agreement 8 months later and I can happily say that we bought our new 175sqm, free-standing home. The fact that we could settle my wife's car payments (including a 30% residual) was an absolute blessing and we would've struggled to afford the bond on the house if we still had to pay off her car.

Bottom line? We have 3 sources of debt:
- Our house
- My car (with NO residual )
- Credit card (which is a volatile source of credit, settled every month )

We now have more money to spend on furnishing the house and spending on gifts and entertainment over weekends. I can advise anyone to not get involved in too much debt - especially residuals on cars!

Damn...that's SOOOO nice...we actually debating the issue of getting a credit card, we want to fly to CT next month, and need a credit card to make payments online as its just so much easier.

She however don't see the need for a credit card, I see it, as putting the money for the food and petrol and other normal house expenses in the credit card is way beneficial from a NOT USING IT BY ACCIDENT standpoint. We find that having 2 accounts, her's and mine is disasterous...you end up spending more than you should have just coz all the money is in one account...hope I win this credit card battle!

Who here recomends a credit card, and not for rims pleas!

 

[Budza]

Who here recomends a credit card, and not for rims pleas!

I'll recommend one. Builds a credit history for when you need a loan, and as mentioned, is super handy for online transactions etc.

I put almost everything through mine, and get a nice statement every month which serves as a kind of budget. I can see where my cash is goin.

Card is paid off every month, and as it yeilds 4.5%, it usually has a slightly positive balance.

I use Virgin Money- free Credit Card. No fees (except R10 for cash withdrawals). Pretty good deal for a starter Credit Card.

 

[Fazda]

I use my credit card for groceries and fuel...ONLY...and it gets paid off in full every month. It also gives me an excellent credit reference should I need it. If you live beyond your means, however, the CC will kill you.

 

[superskully]

OK, simple example: You finance a R200k car with a 25% (R50k) balloon payment after 60 months.

In 60 months you pay off 75% of the capital debt, plus the interest on the full purchase price. Thus, in the end you owe R50k total after having paid interest on it for 5 years as part of your loan. There is no ADDITIONAL interest on the R50k. You can now, after the 5 years, refinance the R50k which will obviously incur further interest.

The danger of this type of loan is that you run the risk of ending up with a car that is worth less than what you owe, either through not looking after the car, racking up high mileage or smacking it against a wall - or a combination thereof.

Sorry. Thats wrong.
If u have done this deal, let me know who, cos i know from experience u have to pay the extra interest for the balloon payment as this is considered a loan.
Remember, that extra interest is added onto yr installment.
As from my example, the total cost or repayment quoted for me from the dealers finance agents were 330k (on 260k car) for no balloon and 360k if a ballon of 90k was taken. The agent even told me that u pay the interest.

I showed u the example, here it is again, cos enigma u r not displaying the math. Here it is again - 260k car, 60 months (i will do it accurately now - 10% interest)
0k Balloon - 5.5k pm
90k ballon - for 260 - 90, installment is 3.6k.
But my quote was closer to 4.5k, y, cos finance said that the 90k is taken as a loan and the interest is added to the installment.

Now if u tell me that this rule has changed, maybe cos of NCA, then thats different. But nobody has thus far.

 

[HapticSimian]

I can't decide if you're being obtuse, or whether we're just communicating past each other. Each repayment in the above example WITH a balloon payment factored in will consist of:
1. a portion of the price less the residual, so 170k divided by the period of the loan
2. compound interest on 170k
3. compound interest on the 90k residual

So, yes it is a loan in effect, but you pay the interest on it DURING your finance agreement, not after.

I sold cars for 5 years until very recently, yourself?

 

[superskully]

I can't decide if you're being obtuse, or whether we're just communicating past each other. Each repayment in the above example WITH a balloon payment factored in will consist of:
1. a portion of the price less the residual, so 170k divided by the period of the loan
2. compound interest on 170k
3. compound interest on the 90k residual

So, yes it is a loan in effect, but you pay the interest on it DURING your finance agreement, not after.

I sold cars for 5 years until very recently, yourself?

As mentioned this was my experience with 1 finance lady. And yes, the interest is paid in the installment.

1. a portion of the price less the residual, so 170k divided by the period of the loan. Correct
2. compound interest on 170k not 170k but 260k (as u would
3. compound interest on the 90k residual This is the extra interest i talk about. Cos they say its a loan.
If i am wrong, then i was misled. Cos then buying on residual will be worthwile to me.

 

[HapticSimian]

Yes, but it's not EXTRA in the sense that I understood your initial post. You don't pay MORE interest over the period than you would without the residual...

You effectively pay the same interest you would on the entire purchase amount, without paying a cent on the residual value. I think your expectation was that you would pay the same instalment on a R200k car with a 25% residual than you would on a R150k car without. In effect, the interest on your residual amount gets added to what you would pay on a car 25% cheaper without a residual.

I hope that makes some sense?

 

[adamr]

My wife always says it like this...if you can't afford it CASH...then you simply cannot afford it!!!

agree with that statement and both my cars are paid for in cash...

BUT but but it does not hold true in all instances ...

the wiser thing to have done was to leverage myself in some way and not have everything cash! That is why I am now fully financing my Polo replacement being the Fiat 500 (which btw by being stingy i got a 9% discount and still feel im paying too much).

Here is my reasoning:

There are many super wealthy people that do finance ... they will finance a R4M car and have R100M in the bank ... why? simply because the holding costs on that R4M is alot of $$$ .... and this includes among other things interest lost if the money was invested in a bank ... so it is the clever thing to do ...

PS: and i did not finance the Fiat using a balloon payment option, straight agreement sale ...

 

[Sly21C]

I was considering buying a car with a balloon payment, but since I want to own a car after years, I don't think it will be a good idea. I know a car is not an asset but a residual/balloon payment is not for me.

 

[Dolby]

I did the same research when I bought my cars.

The result was that guys that had no clue or experience, said 'no'. The guys that knew what they were talking about, said '*yes'

* with terms and conditions

I took it and am not unhappy

 

[the graduate]

20% residual and 54 months worked out awesomely for us....next time we're not paying a deposit.....going to through the deposit into the bank

If you understand the concept well, balloon all the way....you must just be wise about it....

 

[akescpt]

20% residual and 54 months worked out awesomely for us....next time we're not paying a deposit.....going to through the deposit into the bank

If you understand the concept well, balloon all the way....you must just be wise about it....

wise how? what did u buy?