Buying a car with a balloon payment – What you need to know

konfab

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Jun 23, 2008
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Lol, I think a balloon payment is like a marriage of convenience. It gets you the car you really want, but just understand that you'll be on the losing side of sex for the next six or so years.

With even reasonably entry-level cars costing R300 000 and up these days, you just gotta bite the bullet sometimes. Personally I'd rather get a better quality car with a residual that I'll still want to drive after six years than a budget tin can that I can own outright but which will be unsafe in an accident and I'll hate every minute driving around in. Your mileage might vary.
That is at least honest.
 

RandomGeek

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May 14, 2015
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Balloon payments are like doing lines of cocaine - once you get into that very expensive habit, it is very hard to break and may leave you broke if not well controlled.

Easier just not to start doing it in the first place
 

konfab

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What balloon payments really are, is a way for banks to reduce risk on longer loans for consumers. They probably don't like giving loans longer than 5 years. So balloon payments effectively act as a way to split up a larger loan. This allows them to do a credit assessment during the loan and adjust the interest rate to reduce risk.
 

garp

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Balloon payments are neither bad nor good, it depends on how appropriately they're used. With a GFV deal, the risk is quite low so long as the payment is affordable and you can stay within the terms. Yes, it normally works out more expensive in the long run because you're servicing the interest on the balloon, but in many scenarios it can make sense.
 

konfab

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As pointed out previously, you take a "balloon" payment if you don't plan to keep the car for the full term of the loan. It makes the monthly payments lower. It works especially well with brands like BMW that have guaranteed buyback schemes after 3-4 years.

In these cases, paying the absolute minimum is less important than getting the value of always driving a relatively modern vehicle. From this point of view it's one of the most economical ways to do that, compared with long-term rentals or leases.

If you plan to keep the car for the long term, then of course it's stupid because if you couldn't afford the higher payments monthly, how are you going to afford 30% of the car's value all at once.
You refinance.
 

Lupus

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Agreed, but the problem is that its never going to become cheaper, so people taking on too much debt means they're just shooting themselves in the foot.

I worked with this lady, she was always complaining about not having money to do xyz. But then you look at her lifestyle, new car, new phone every year, new clothes every time you see her etc.

Taking on debt is already bad enough, but the balloon payment tricks a lot of unwary people into an even more precarious situation.
Yup I knew someone who was paying essentially the same on their Clio as I am on mine, mine was a newer better model and I also put down a massive deposit, they sold the Clio and were shocked to find out they needed to find R60k to pay off the balloon.
 

handyman007

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Yup I knew someone who was paying essentially the same on their Clio as I am on mine, mine was a newer better model and I also put down a massive deposit, they sold the Clio and were shocked to find out they needed to find R60k to pay off the balloon.
Why were they shocked, surely they read and signed the contract?
 
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konfab

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You can, and effectively make your 72-month loan into a longer one. Crappy situation to be in but it must be done sometimes.
If you are using it to buy a car you will keep for the foreseeable future, it isn't too bad IMO.
 

Foxhound5366

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That is at least honest.
My goodness, the rental car I got at the airport is a Renault Kwid ... it looks good from the outside, but it is a terrible little car. Everything is cheaper than you would think is possible. The 1-litre turbo engine has some surprising pep, but it's just a uncomfortable car to be in (not least because I'm 1.85m tall). If this is the car I could get without a residual, I'd choose residual any day for a better car. And I have, with my Polo.
 

Lupus

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My goodness, the rental car I got at the airport is a Renault Kwid ... it looks good from the outside, but it is a terrible little car. Everything is cheaper than you would think is possible. The 1-litre turbo engine has some surprising pep, but it's just a uncomfortable car to be in (not least because I'm 1.85m tall). If this is the car I could get without a residual, I'd choose residual any day for a better car. And I have, with my Polo.
The Kwid doesn't have a turbo?
 

Stonemason

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Mar 13, 2017
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Many people settle a car loan before the end of the term. That can be by either doing accelerated repayments or by buying a new car before the term is over. If this is your habit, buying a car with a residual makes good sense. If not, do not do it.
 
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