Balloon payment, or not.... ?

[SauRoNZA]

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.

Probably not an issue when you can afford the maintenance items such as tyres and services and such.

Problem is more often than not the people who take the balloon payment are the same people who can't afford to even maintain the car they could have gotten without it.

Come year two and they are struggling to stick to schedules or deem other things more important. Come selling time and the car is worth even less, now needs to refinance.

Perpetual cycle starts and often ends badly.

I mean just look at the poster above wanting to go from a paid for Chico to a 200k+ GT86 because of an upcoming increase.

It's madness and a disaster waiting to happen.

Short term fix for a long term problem. Can work for some, but probably won't for most.

Finance houses wouldn't keep offering it if there wasn't money to be made after all.

 

[Gaz{M}]

Which is why people need to take the time to educate themselves. Why is it always up to society to protect fools and their money.

 

[The_Traveller]

Which is why people need to take the time to educate themselves. Why is it always up to society to protect fools and their money.

Also for them to try and 'make sense' of decisions made by others , that has sweet f*kall to do with themselves

 

[Dolby]

Short term fix for a long term problem. Can work for some, but probably won't for most

+1

Understood and agreed - but not even consider is also foolish. Someone above made reference to the financially literate and in my experience, it's been the opposite of what he found. Financially literate will ask why/what and base the choice on that where those that know very little stick to NO like the plague.

I can't remember the figures, so I'm going to make up a few, but I had a friend looking at buying a new R250,000 Renault Megane a few years ago using various options. Option #1 was a 50% residual, guaranteed buy back at the end of the period for the residual and very low interest @ R3.5k. Option #2 was standard ISA - no residual, buy back and standard interest @ R6k. He could afford to pay R8kpm


It made more sense to get Option #1, pay in R8kpm, kill the residual fast and benefit from the interest and the guaranteed buy back

 

[Dolby]

There's other situations too - I'm renovating a house over the next 6-12 months and pumping an additional R3kpm into an appreciating asset is going to help financially, as the property value increase from the coast of paint and a few odd renovations is more than I'd lose on the car. On the months I don't need to do anything with the car, it can simply be paid into the car as per normal.

Also - 2 of my shares are running a return of 30%+ .... R3kpm would do great in there as opposed to the car.

Or as mentioned, just driving what you want and accepting the loss. Mine was R20,000 over 3.5 years to drive an RSI over a 1.6 - which I'd do again.

 

[Gaz{M}]

I had a friend looking at buying a new R250,000 Renault Megane a few years ago

Imagine if your friend had bought a car that didn't have terrible resale value. The deal would have been even better.

I personally took a balloon for cash flow reasons and the fact that my vehicle interest rate was so low it made sense to rather invest the R1500 a month I saved in instalments.

 

[Pitbull]

+1

Understood and agreed - but not even consider is also foolish. Someone above made reference to the financially literate and in my experience, it's been the opposite of what he found. Financially literate will ask why/what and base the choice on that where those that know very little stick to NO like the plague.

I can't remember the figures, so I'm going to make up a few, but I had a friend looking at buying a new R250,000 Renault Megane a few years ago using various options. Option #1 was a 50% residual, guaranteed buy back at the end of the period for the residual and very low interest @ R3.5k. Option #2 was standard ISA - no residual, buy back and standard interest @ R6k. He could afford to pay R8kpm


It made more sense to get Option #1, pay in R8kpm, kill the residual fast and benefit from the interest and the guaranteed buy back

So he would have lots 50% of the value of the vehicle in 3 years?
How is that good then taking the balloon? The guaranteed buy back is for the residual amount - 50% value. It being a Renault I suppose 50% in 3 years would have been a great deal. But no way in hell I would advise anyone ever to do what you mentioned in this example. Never. So he pays 8k a month over 3 years. "Killing the residual" as you say.

Bought car for R 250 000. 50% residual so had to pay R 125 000 less residual. He pays R 8k a month for 3 years R 288 000. He then has a buy back option of 50% so het gets back R 125 000 of the R 288k paid. He paid R 4 527.78 a month to own a car for 3 year and has NOTHING to show for it after 3 years.

If he bought the car out right: He would have paid around R 6 250 depending on the interest. He would have had the vehicle for 5 years and at the end of it still had the vehicle let's say valued at around 35% (it's a Renault) R 87 500. So the difference paid between the 4 527.78 and the 6 250 will make up R 86 111 over 50 months. So with a very rough depreciation he still would have been slightly better off paying a little more per month over the period of 5 years, than paying R 8 000.00 with a residual of 50%.

I know this was all based on thumb suck figures and so was mine, even the interest rate used was very rough. HP trumps residual even with your example. Not by much, but a little. If we are to use correct figures the difference in the benefits of HP of Residual will be much higher.

 

[Dolby]

Imagine if your friend had bought a car that didn't have terrible resale value. The deal would have been even better

Well with the guaranteed buy back, resale wasn't a concern as he knew if he kept under 90,000km and a few other terms, he'd get back a known value value in 5 years.

 

[Dolby]

So he would have lots 50% of the value of the vehicle in 3 years?

You'd lose 50% or more on most cars in 3 years - Toyota, Audi, BMW etc

Let's for argument say the residual was R125,000 which would be the final payment after 5 years - and the guaranteed buy back of R125,000.00 would make that null and void. So after 5 years you're right - he'd have nothing at the end of the period and effectively have rented the car at R3.5kpm. I'd need to get the exact figures to work out, but it was the better option because he was guaranteed the R125,000 (as opposed to R90,000 because it was a Renault) and he saved 5% off the other option.

But even renting a new car at R3.5kpm with maintenance/service plan may benefit certain people? There's no worry or fuss and you give the car back - you haven't lost your millions as some people claim, you can budget 100% for the next 5 years and you can use the remainder of the R8,000.00 to better use.

All I'm saying is that it's not all evil and depends on needs, financial situation etc. As pointed out earlier, if you're stretching your budget to get something you couldn't otherwise get (which is probably most cases), then don't. But it's worked for me 3 of 3 times, even though I lost R20,000.00 over the period. I had the extra cash flow for holiday and socializing - and on the months I didn't have any, I could put it back into the car.

 

[Pitbull]

You'd lose 50% or more on most cars in 3 years - Toyota, Audi, BMW etc

Let's for argument say the residual was R125,000 which would be the final payment after 5 years - and the guaranteed buy back of R125,000.00 would make that null and void. So after 5 years you're right - he'd have nothing at the end of the period and effectively have rented the car at R3.5kpm. I'd need to get the exact figures to work out, but it was the better option because he was guaranteed the R125,000 (as opposed to R90,000 because it was a Renault) and he saved 5% off the other option.

But even renting a new car at R3.5kpm with maintenance/service plan may benefit certain people? There's no worry or fuss and you give the car back - you haven't lost your millions as some people claim, you can budget 100% for the next 5 years and you can use the remainder of the R8,000.00 to better use.

All I'm saying is that it's not all evil and depends on needs, financial situation etc. As pointed out earlier, if you're stretching your budget to get something you couldn't otherwise get (which is probably most cases), then don't. But it's worked for me 3 of 3 times, even though I lost R20,000.00 over the period. I had the extra cash flow for holiday and socializing - and on the months I didn't have any, I could put it back into the car.

yes I agree there will be a scenario where a residual would be a better option than buying. This however is not something I would advise anyone on doing. Yes, if you are going to be driving a new car every 3 years and you are ok financially to pay a car instalment for the rest of your life go for it. This I would say would be people like pensioners who are financially sound, people who use the cars for business (The tax rebate) or Financially well off. a Kid who is starting a career and not even bought a house yet which has it's own expenses. This is not a viable option ever.

 

[Dolby]

a Kid who is starting a career and not even bought a house yet which has it's own expenses

+1

 

[kat06sa]

I mean just look at the poster above wanting to go from a paid for Chico to a 200k+ GT86 because of an upcoming increase.

It's madness and a disaster waiting to happen.

Lol, just need to defend myself here. Chico, on old job. New job pays 4 times as much, with significant scheduled increase. Definitely not on the fringe on affordability. Was just asking about all the options.

 

[Pitbull]

Lol, just need to defend myself here. Chico, on old job. New job pays 4 times as much, with significant scheduled increase. Definitely not on the fringe on affordability. Was just asking about all the options.

Kat06sa,

No one can tell you what you must do. We can only advice according to experience. We have all made very stupid financial mistakes starting out and I believe the best lessons in life are taught through trail and error . You're young, buy the GT86 if you want with a residual. No one can fail you for doing what your heart wants. Just know that at some point you are going to have to refinance the residual and you will be stuck with a car for long than you want and pay more on interest. All the best to you

 

[Former member 61586]

balloon payments...

helping people drive (not own or afford) cars they cannot afford and keeping banks and car dealers in business since....when did this balloon payment crap come in anyway? :?

 

[Roelie]

The problem about over committing yourself is that you have no idea what's waiting around the corner.
I am on the back end of my working life and can probably contribute to the discussion from my life experience.
I am fortunate that a fancy car is not very high on my list of must-haves, I would much rather spend money on my house and my tech toys, I have always driven a car for at least 10 years, and only when it becomes too expensive to maintain will I move on. But I have seen many friends and colleagues overextending themselves just to have that new car feeling, and the company they work for goes bang, or they get retrenched and then they sit with a horrific debt to cover and often end up losing their lovely car, and much more.
I got retrenched once, and I could survive because I was debt free.

 

[Roelie]

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.

It’s easy to be "clever" if the car debt is only a tiny percentage of your monthly budget, but for the Average Joe it forms a substantial part of his budget, so he has to be much more careful of how he structures the deal.

 

[Former member 61586]

Are there any people who can afford the full monthly payment or can afford to pay the car cash who voluntarily choose a residual/balloon deal instead?

 

[Pitbull]

Are there any people who can afford the full monthly payment or can afford to pay the car cash who voluntarily choose a residual/balloon deal instead?

If I had a fleet of vehicles for business use I would. Only to have them replaced every 3 years to keep the fleet up to date. Then and only then I would take that option.

 

[SauRoNZA]

If I had a fleet of vehicles for business use I would. Only to have them replaced every 3 years to keep the fleet up to date. Then and only then I would take that option.

But then surely a leasing deal would make much more sense than conventional finance.

 

[konfab]

Are there any people who can afford the full monthly payment or can afford to pay the car cash who voluntarily choose a residual/balloon deal instead?

I think there is a bit of a market for people who *really* hate having mechanical problems with their car. If you are getting a new one every 3-4 years, you will probably stay within the service plan before you get a new car. Thus it is unlikely you will get mechanical trouble.

For some people the inconvenience of having to deal with the breakdown is far worse than paying more every month.