Balloon payment, or not.... ?

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Nikita1

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What is your opinion on taking a balloon payment option or not?

If I want to trade-in the new car I buy, after 3 years,
and get a new car, and start paying it off again, instead of keeping it after paying it off after 5 years,

is it better to put down no deposit, and take a balloon payment ?

or no deposit, no balloon payment ?

If I have no deposit, and no balloon payment, and then I trade it in after 3 years,
is there a difference, compared to if I did have a balloon payment ?
Im not sure how it works. Which is better?
 
Calculate how much could be your balloon payment without deposit.

Calculate how much would be the deposit with the same instalment than if you had only the balloon payment.

If you think that by investing the money you would have to pay in deposit now, you can reach a higher amount than the balloon you'll have to pay, then do this.
 
HavocXphere said:
Buy a cheaper car
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That is not in slightest related to the question. The OP didn't say they're considering a balloon payment because she/he can't afford the car.

If you're planning on trading it in after three years, then a balloon payment is not a bad option, contrary to popular belief. Just make sure you will be able to trade the car in for enough to cover the outstanding capital balance on the loan plus the balloon payment otherwise you'll have to refinance a portion which is not good.

The balloon payment, in much the same way as a deposit, reduces the amount of interest you'll pay quite a bit. If possible, make the term on the loan 3 years, so you won't have anything to cover there.

Also, the depreciation after three years will be between 30% - 60% depending on the make and model and mileage, so don't take more than a 30% residual.
 
Frikkenator said:
That is not in slightest related to the question. The OP didn't say they're considering a balloon payment because she/he can't afford the car.

If you're planning on trading it in after three years, then a balloon payment is not a bad option, contrary to popular belief. Just make sure you will be able to trade the car in for enough to cover the outstanding capital balance on the loan plus the balloon payment otherwise you'll have to refinance a portion which is not good.

The balloon payment, in much the same way as a deposit, reduces the amount of interest you'll pay quite a bit. If possible, make the term on the loan 3 years, so you won't have anything to cover there.

Also, the depreciation after three years will be between 30% - 60% depending on the make and model and mileage, so don't take more than a 30% residual.
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HavocXphere said:
Dude you have no idea what you're talking about. Balloon payments *increase* total interest paid.

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Agreed. I would love to know of any such arrangement without a deposit. Or if no deposit, how anyone believes this "balloon" payment is a good deal. And again, if you pay a deposit with a "balloon" payment you are just putting down a deposit (which you will not get back) to rent a car.
 
HavocXphere said:
Dude you have no idea what you're talking about. Balloon payments *increase* total interest paid.
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Of course you pay interest on the residual, which is why I said make the loan term shorter (preferably as long as you're going to drive it before trading it in). The residual allows you to decrease your monthly payments which allows you to pay off the loan quicker.

Consider this: You buy a car of R300k, you have the following options:
a) Take a loan over 60 months, knowing you want to trade it in after 36 months, no deposit, no residual. After 3 years you still owe R141k (the car is now worth R140k). You trade in the car and have to pay in R1000, and you've paid roughly R82k interest.

b) Take a loan over 36 months, no deposit, 30% residual. After 3 years you owe R90k, and have paid R73k interest. You trade it in and have R50k to use as deposit on the next car.
 
Frikkenator said:
Of course you pay interest on the residual, which is why I said make the loan term shorter (preferably as long as you're going to drive it before trading it in). The residual allows you to decrease your monthly payments which allows you to pay off the loan quicker.

Consider this: You buy a car of R300k, you have the following options:
a) Take a loan over 60 months, knowing you want to trade it in after 36 months, no deposit, no residual. After 3 years you still owe R141k (the car is now worth R140k). You trade in the car and have to pay in R1000, and you've paid roughly R82k interest.

b) Take a loan over 36 months, no deposit, 30% residual. After 3 years you owe R90k, and have paid R73k interest. You trade it in and have R50k to use as deposit on the next car.
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HavocXphere said:
Dude you have no idea what you're talking about.
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....in fact its just getting worse.
 
Okay never mind Havoc, you're right, I got the numbers wrong.

Your instalment is still higher with the balloon over 36 months (R7.9k) than it is without it over 60 (R6.7k) ( (obviously). But if you pay the additional bucks every month then you end up at pretty much the exact same place as with the balloon after 36 months, owing R90k.

That is if you pay the additional R1200 a month on top of you insalment on the 60month loan.
 
Frikkenator said:
Okay never mind Havoc, you're right, I got the numbers wrong.
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Gracefully conceding a point...not something one sees often on mybb these days. :)

In turn I'll concede that my "cheaper car" comment was perhaps a little premature & made without sufficient info. I just find that people that consider balloon payments are often pushing the limits on what they can afford.

Anyway - back to OP...

The general rule is to avoid balloon payments at all costs...perhaps there is a viable scenario for it where that makes sense but I can't see it. Generally you'd try to max the deposit, though sometimes you get a better rate for financing a bigger amount...so then you'd go for zero deposit and dump what you would have paid as deposit into the loan immediately (possibly incurring one months interest on the "deposit").

Also...if you've got bullet proof discipline then I'd suggest you finance it over the max term possible (60 months)...but then pay it off as if its a 36 month loan. This gives you the benefits of a short loan (lower total payment)...but when the sht hits the fan you've got a bit more breathing room & can reduce the payments made if absolutely necessary. Dangerous strategy though without serious discipline...
 
HavocXphere said:
The general rule is to avoid balloon payments at all costs...perhaps there is a viable scenario for it where that makes sense but I can't see it.
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If you have an investment opportunity paying better than the interest rate (of course at these rates it won't be capital guaranteed therefore do it only with money you are ready to lose), it is interesting to put no deposit and invest the money from the deposit in it to repay the balloon and get extra interests. Not easy but not impossible.
 
HavocXphere said:
Gracefully conceding a point...not something one sees often on mybb these days. :)

In turn I'll concede that my "cheaper car" comment was perhaps a little premature & made without sufficient info. I just find that people that consider balloon payments are often pushing the limits on what they can afford.
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Lol, yea I've realised it is something I need to work on. You're right though, and it is abused quite heavily in advertisements as well (Buy this Hyundia for R1699 per month, in fine print 60% residual). I once had someone who has a much better understanding of money explain to me how it can be beneficial, but I'll leave it to the pro's.
 
If you need a balloon payment to be able to buy a car you can't afford it.
 
Balloon payments are for people who want to drive a car which they can't afford, or for people who don't understand the principle and think that this balloon payment magically disappears when they buy a new car.

Never opt for a balloon payment. Ever.
 
bromster said:
Balloon payments are for people who want to drive a car which they can't afford, or for people who don't understand the principle and think that this balloon payment magically disappears when they buy a new car.

Never opt for a balloon payment. Ever.
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Nice if you have other options, but some people don't. For example, several years ago my circumstances changed drastically. At the same time my car basically died and crossed the point where it was more to fix than it was to replace. I had a young family and I had to travel a lot, and I needed a reliable car. So I took a car with no deposit and a balloon payment because it was the only way to get a new car at the time. So I worked hard, and I paid it off before the term was up.

The reliability of a new car with the knowledge that I'm not buying a second hand car and someone else problems, was just far more important than the ballon payment at the time.

I'm not advocating this, but sometimes needs dictate.
 
As I said, you opted for the balloon payment because you couldn't afford the car you wanted at the time. That's what balloon payments are for.

I'm glad you were able to shorten your term and pay it off quickly. You probably saved a lot of cash in doing so, but the principle remains the same. ^
 
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