Balloon payments Pro's and con's

Pitbull

Pitbull

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This has been a hot topic on here a few times before.

Interesting and informative article on IOL today:

Johannesburg - If you’re entering a hire-purchase or lease agreement, do your sums and find out whether you can afford the monthly payments, and whether there’s any balloon or residual payment at the end of the finance term.

Balloon payment deals allow you to drive a more expensive car than you could otherwise afford, by letting you pay a lower instalment over the finance period but hitting you with a lump sum at the end – which you must either pay as a one-off or re-finance (paying yet more interest and fees), which many people cover by selling the car.

It’s important to remember that you do not have to go through the bank of the car dealer’s choice. You can ask for different quotes from other banks and you are in a position to take the best deal for you, not the dealership.

More and more buyers, in both the new and used markets, are opting for finance structures that lower their monthly repayments. These include the use of large balloon payments (also known as residuals) as well as taking advantage of the longer repayment periods that banks started offering since the implementation of the National Credit Act (NCA).

HEAD vs HEART

“Consumers can sometimes be led by their heart, rather than their head when shopping for cars, but they should resist the urge to splash out and get a vehicle that is not in their price range,” says WesBank spokesman Rudolf Mahoney. “They should carefully consider the repercussions of structuring their deals simply to have lower monthly payments, because they will ultimately end up paying a lot more.”

When the NCA was introduced in June 2007, demand for balloon payments plummeted as more buyers opted instead for longer contract periods to help reduce monthly repayments. Since then, demand for balloon payments has grown by 60%. Presently, one in every five finance deals includes a balloon payment that equals roughly 17% of the finance amount.

In the same timeframe more buyers have also opted for longer finance periods.
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More in the link
 
People need to learn to live within their means.

What most people also miss, is that you pay the interest on the balloon amount during the finance term. So if you don't have the money to settle the balloon amount and need to re-finance it at the end of the term, you will be paying interest again.
 
ambroseg1 said:
People need to learn to live within their means.

What most people also miss, is that you pay the interest on the balloon amount during the finance term. So if you don't have the money to settle the balloon amount and need to re-finance it at the end of the term, you will be paying interest again.
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Double Interest
 
If you can't afford a car without the balloon payment, you need to look at cheaper cars.
 
I'm always amazed at how people buy cars with balloon payments, and then refinance the balloon again. It's just about the worst way to acquire a car.

Like mentioned before, live below your means. The only way you can win in the long run
 
Are there ANY pros to balloon payments?
Such foolishness.
 
Another thing, have you ever noticed how many people look at a car's monthly installment to determine if they can afford it, neglecting to calculate for how many years they need to pay that installment. Like there's no difference if you finance over 3 years or 4 years...
 
I see this always way too much. Especially with the younger black middle class. Yeah I know you earn 15k pm and driving a 2015 Golf R. There's no way you don't have a balloon on that thing.
 
Wouldn't it make scene to take out a balloon payment on the vehicle if you intend to trade it in at the end of the term. Most people now days tend to trade in their vehicles once the motor plan is due to expire. It makes for hassle free motoring.
 
Toxic T said:
Wouldn't it make scene to take out a balloon payment on the vehicle if you intend to trade it in at the end of the term. Most people now days tend to trade in their vehicles once the motor plan is due to expire. It makes for hassle free motoring.
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If your goal is to always drive a car you owe a lot on, then yes it would make sens. One of our cars is paid off, and the other is almost. Nothing fancy, but much less worry about payments every month. Different strokes, i guess...
 
bokdrol said:
Are there ANY pros to balloon payments?
Such foolishness.
Click to expand...

If you have a car allowance, especially with conditions like having to change cars every three/five years and you are contracted to only spend that money on a car...then and only then does it really make any kind of sense because you simply pay the money every month towards that.

Most normal people though should aim to pay their car off as quickly as possible and then NOT buy another one unless they need to.

If your car is your office it's about the only time where it makes sense to get a better car for less money as it directly affects your day to day lifestyle. If you car is only to drive from Point A to Point B then it's silly spending money you don't have on it.
 
Toxic T said:
Wouldn't it make scene to take out a balloon payment on the vehicle if you intend to trade it in at the end of the term. Most people now days tend to trade in their vehicles once the motor plan is due to expire. It makes for hassle free motoring.
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Forever in debt...
 
Personally I can't believe that only 1 in every 5 finance deals include a balloon payment. I would have thought the number to be closer to 50 or 60%
 
ToxicBunny said:
Personally I can't believe that only 1 in every 5 finance deals include a balloon payment. I would have thought the number to be closer to 50 or 60%
Click to expand...

Also don't believe it. Every single person I know or talk to who has bought a new car has done so using residual.
 
bokdrol said:
Are there ANY pros to balloon payments?
Such foolishness.
Click to expand...

No pros that I can think of. It just doesn't make financial sense at all.

When motor plan is up, surely your loan term should also be up. So yes, you will be paying for the annual service. But then you wont be paying monthly instalments. So you save big time there.
 
ChocolateBadger said:
I see this always way too much. Especially with the younger black middle class. Yeah I know you earn 15k pm and driving a 2015 Golf R. There's no way you don't have a balloon on that thing.
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Huh...wait.

Can someone break that down for me: R15k pm & R525k (base) G7 R...

How is that even possible?
 
FiestaST said:
Huh...wait.

Can someone break that down for me: R15k pm & R525k (base) G7 R...

How is that even possible?
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84 month finance terms. 50% balloon payments.

Anybody know what the maximum percentage a balloon payment can be?
 
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