Balloon payment, or not.... ?

[bromster]

I am in my 30's, I have been working for over 10 years, this is the first job where I can afford to buy a new car.
I think the option of trading your car in every 3 years or so, and settling the amount, and buying a brand new car, is a nice option to have, if you can afford the R3000 or so repayments every month.

As tempting as it may seem, do not buy a brand new car. Always buy demo or second hand and you will save thousands. Also, use the provided car repayment calculators and see what car you could afford to pay off in 3 years or less. Financing a car over the full 5 or 6 year term is financial suicide.

Based on your R3000 budget, you could finance a R100000 car over 3 years with a R10k deposit. This way you will only pay a total of 18k interest over the 3 years.

Your same budget and deposit could also buy you a car for R140000, but you will need to finance over 5 years to get the monthly installment down to R3000. As a result, you throw away a total of R44000 in interest over the 5 year period.

Now you just need to decide which is more important; having a flashy new car, or saving R26000 towards your next one. Good luck.

 

[Rouxenator]

No. Buy something you can afford without a balloon payment.

 

[Pitbull]

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?

Yes, that works fine. However at some point you are going to want top either move away from car debit or hold on to a vehicle past the 3 years. You will then at some point be slapped with a debt you either have to re-finance at more interest above what you already paid or fork out a bulk payment.

Better to stay away, far far away

 

[kat06sa]

Balloon payments make sense when your income is set to increase by far more than the average over the next five years. E.g. First job.

So my take home pay is set to increase by just under 50% in the next 12 months. And I really want to ditch my Chico which I've had for 7 years. So I want something pretty soon. Without a balloon I was looking at the Kia Rio. But, my life finally getting out of the doldrums, I've looked at cars with a bit more life. But I'd need to take a balloon payment initial to afford it with some comfort.

Good idea, bad idea. Take the car now and refinance to eliminate the balloon once I get the salary bump?

 

[Brenden_E]

So my take home pay is set to increase by just under 50% in the next 12 months. And I really want to ditch my Chico which I've had for 7 years. So I want something pretty soon. Without a balloon I was looking at the Kia Rio. But, my life finally getting out of the doldrums, I've looked at cars with a bit more life. But I'd need to take a balloon payment initial to afford it with some comfort.

Good idea, bad idea. Take the car now and refinance to eliminate the balloon once I get the salary bump?

To assume you will get a massive salary increase is a helluva assumption.

 

[Mike Hoxbig]

So my take home pay is set to increase by just under 50% in the next 12 months. And I really want to ditch my Chico which I've had for 7 years. So I want something pretty soon. Without a balloon I was looking at the Kia Rio. But, my life finally getting out of the doldrums, I've looked at cars with a bit more life. But I'd need to take a balloon payment initial to afford it with some comfort.

Good idea, bad idea. Take the car now and refinance to eliminate the balloon once I get the salary bump?

If you're finally getting out of the doldrums, why are you trying to get yourself back into it? If there's nothing wrong with your car then I would say wait a bit until you're comfortable that you're more financially stable...

 

[Blue Shirt]

So my take home pay is set to increase by just under 50% in the next 12 months. And I really want to ditch my Chico which I've had for 7 years. So I want something pretty soon. Without a balloon I was looking at the Kia Rio. But, my life finally getting out of the doldrums, I've looked at cars with a bit more life. But I'd need to take a balloon payment initial to afford it with some comfort.

Good idea, bad idea. Take the car now and refinance to eliminate the balloon once I get the salary bump?

Do you think it is a good idea to spend money that you have not earned yet?

Balloon payments are a curse inflicted by finance houses on financially illiterate consumers who want to live beyond their means.

 

[Ancalagon]

So my take home pay is set to increase by just under 50% in the next 12 months. And I really want to ditch my Chico which I've had for 7 years. So I want something pretty soon. Without a balloon I was looking at the Kia Rio. But, my life finally getting out of the doldrums, I've looked at cars with a bit more life. But I'd need to take a balloon payment initial to afford it with some comfort.

Good idea, bad idea. Take the car now and refinance to eliminate the balloon once I get the salary bump?

If your 7 year old chico is still going strong, then keep it until you get your salary bump. If your chico is giving you problems, sell it and buy a car for which you would not need a balloon payment. Also, take the loan over no more than 5 years.

If you need to take the loan over 7 years or with a balloon payment to afford it, then it is too expensive for you.

 

[kat06sa]

To assume you will get a massive salary increase is a helluva assumption.

Initial probation period is based on experience, once complete you move to the normal company payscale. But I do understand you point.

If you're finally getting out of the doldrums, why are you trying to get yourself back into it? If there's nothing wrong with your car then I would say wait a bit until you're comfortable that you're more financially stable...

Yeah, point taken. Probably guilty of thinking with my heart before my head. Properly sick and tired of my current car so I've already decided I need to replace it. Just looking at all the options of financing it, and a balloon seemed like a quick fix, as the car I'm looking at is R50 000 more than the Rio.

 

[Pitbull]

Initial probation period is based on experience, once complete you move to the normal company payscale. But I do understand you point.



Yeah, point taken. Probably guilty of thinking with my heart before my head. Properly sick and tired of my current car so I've already decided I need to replace it. Just looking at all the options of financing it, and a balloon seemed like a quick fix, as the car I'm looking at is R50 000 more than the Rio.

It can be done. I'm sure you will make it work. However as noted before. When the vehicle is due for the balloon payment you have 2 choices: 1. Trade in on a new vehicle and hope your trade covers the balloon 2. Settle the balloon payment.

At some stage in your life you are going to want to stop car payments so at one or another stage you will end up with #2. That is a given fact. You are going to want to buy a house and what not.

Now when #2 comes you either have to lend the money again and pay more interest or you need to sell the car and be without any car. The very last resort is saving a few grand every month which you are saving on the payments if it was a normal HP. But that defeats the purpose as you can't afford the normal HP anyway.

You need to think about this long and hard. The best advice in this thread... DON'T DO IT!. You will burn yourself. if not in 3 years or 6 maybe in 9 or 12. It will bite you at some point.


Edit: As for the bold part. Buy the one you want second hand for the same price as the New Rio... Problem solved.

 

[kat06sa]

It can be done. I'm sure you will make it work. However as noted before. When the vehicle is due for the balloon payment you have 2 choices: 1. Trade in on a new vehicle and hope your trade covers the balloon 2. Settle the balloon payment.

At some stage in your life you are going to want to stop car payments so at one or another stage you will end up with #2. That is a given fact. You are going to want to buy a house and what not.

Now when #2 comes you either have to lend the money again and pay more interest or you need to sell the car and be without any car. The very last resort is saving a few grand every month which you are saving on the payments if it was a normal HP. But that defeats the purpose as you can't afford the normal HP anyway.

You need to think about this long and hard. The best advice in this thread... DON'T DO IT!. You will burn yourself. if not in 3 years or 6 maybe in 9 or 12. It will bite you at some point.


Edit: As for the bold part. Buy the one you want second hand for the same price as the New Rio... Problem solved.

Well I was looking at a 2nd hand gt86 (yeah, I'm one of those). Also had a look at the STI but the running costs after 100k can be scary. I am relatively young without any family commitments yet so I am looking for something a bit fun. The plan to move on after about 4 years then move on, or if I get hitched get something sensible.

The balloon just looked like a quick gap fix since the cars price points aren't too far away. Seems I need more patience.

 

[Pitbull]

Well I was looking at a 2nd hand gt86 (yeah, I'm one of those). Also had a look at the STI but the running costs after 100k can be scary. I am relatively young without any family commitments yet so I am looking for something a bit fun. The plan to move on after about 4 years then move on, or if I get hitched get something sensible.

The balloon just looked like a quick gap fix since the cars price points aren't too far away. Seems I need more patience.

100k kms on todays cars is NOTHING!

Cars of today do over 300kms without breaking a sweat 100k is just driven in man.

 

[Gaz{M}]

You are all missing some important questions:

1) What make and model of car is the buyer looking at (popular cars depreciate much less than unpopular cars and so a balloon is much less of a risk in a popular brand e.g. VW Polo vs Volvo/Fiat)

2) Are you buying new or used. Arguably, a balloon on a used vehicle makes more sense because the new car depreciates much more in the first 2 years and the balloon is a % of the full value before depreciation.

3) What is your total disposable income per month after you have paid all your bills and obligations. If your total disposable income is just enough to pay the instalment with a balloon, you can't afford the car.

4) Could you afford the instalment on the car without a deposit or residual from your disposable income? If yes, then a balloon is more of a financial means than a way to afford a car you shouldn't buy.

5) What interest rate will you be offered by the finance house? Is it less than prime? Then a balloon can be a way to reduce your monthly payments, freeing up cash for other investments like your bond (at a higher interest rate) or shares, ETF's and unit trusts which return much higher than the car interest rate.

If you can answer positively to all these, then I think a balloon isn't a bad idea.

 

[Pitbull]

You are all missing some important questions:

1) What make and model of car is the buyer looking at (popular cars depreciate much less than unpopular cars and so a balloon is much less of a risk in a popular brand e.g. VW Polo vs Volvo/Fiat)

2) Are you buying new or used. Arguably, a balloon on a used vehicle makes more sense because the new car depreciates much more in the first 2 years and the balloon is a % of the full value before depreciation.

3) What is your total disposable income per month after you have paid all your bills and obligations. If your total disposable income is just enough to pay the instalment with a balloon, you can't afford the car.

4) Could you afford the instalment on the car without a deposit or residual from your disposable income? If yes, then a balloon is more of a financial means than a way to afford a car you shouldn't buy.

5) What interest rate will you be offered by the finance house? Is it less than prime? Then a balloon can be a way to reduce your monthly payments, freeing up cash for other investments like your bond (at a higher interest rate) or shares, ETF's and unit trusts which return much higher than the car interest rate.

If you can answer positively to all these, then I think a balloon isn't a bad idea.

Nothing, nowhere, ever trumps Balloon payment over HP.

 

[Paul_S]

100k kms on todays cars is NOTHING!

Cars of today do over 300kms without breaking a sweat 100k is just driven in man.

It depends on how the vehicle has been treated.
I once purchased a vehicle with 130,000km on the clock and after the oil thickener broke down I found out it had big end knock.
Then the front suspension started giving trouble, then the clutch started to slip ...
Whoever drove it before me must have thrashed the hell out of it because the model in question is known to be very reliable and 200,000km care free kilometers should have been easily obtainable.

There are too many Michael Schumacher wannabees trashing vehicles from one traffic light or stop street to the next.

 

[me_]

It's far better to pay a car off completely then you can sell it and use that as a deposit on the next car. That way you get out of the cycle of never owning a vehicle and you use the value of your previous car to keep buying new ones.

The problem is getting to a starting point where you have a first car of some value for your deposit.

 

[Paul_S]

It's far better to pay a car off completely then you can sell it and use that as a deposit on the next car. That way you get out of the cycle of never owning a vehicle and you use the value of your previous car to keep buying new ones.

The problem is getting to a starting point where you have a first car of some value for your deposit.

Even better, you pay off the vehicle, then take what you would be paying for a new vehicle and put it aside for a replacement vehicle.
Then when you're ready you use the cash in hand and the previous vehicle as a deposit to purchase another vehicle without needing any loan agreements.
You'll be saving yourself hundreds of thousands or possibly even millions of Rands in the long term.
The down side is that you won't be driving a new car like the Jones's every couple of years.

 

[Dolby]

illiterate consumers who want to live beyond their means.

I've actually found the opposite.

The middle class, average Joe refuses to accept a residual and rather saves for years to buy a car cash and tells people about his fantastic financial skills - but the wealthy and financially literate never buy a car cash and will at the the very least look at the pros and cons of a residual because frankly, there's not a one answer fits all.

 

[Brenden_E]

I've actually found the opposite.

The middle class, average Joe refuses to accept a residual and rather saves for years to buy a car cash and tells people about his fantastic financial skills - but the wealthy and financially literate never buy a car cash and will at the the very least look at the pros and cons of a residual because frankly, there's not a one answer fits all.

Lawl - spot the guy who got the residual

 

[Dolby]

Yup - third time

Scoring after listening to financially literate people If I came here and took my advice from the same forum I got my IT advice from, I'd be losing all the way.

EDIT : I lost R20,000.00 on first car over 3.5 years of residual - but I drove something I wanted to drive and loved for those 3.5 years. I'd do it again for the loss over the time.