What you didn’t know about balloon payments

What you didn’t know about balloon payments -King Price Insurance

When buying a car, there are a couple of financial implications that you need to consider such as car insurance and how you will finance the vehicle. The 3 most basic financial options that you can choose from include buying your dream car outright with cash, paying a cash deposit and taking out finance for the balance, or financing the entire amount.

The fun doesn’t stop if you choose to finance your car, because with this option you can then decide if you want a balloon payment deal. On the surface, it appears that a balloon payment is a good idea, because it reduces the overall sale price. This way, you can buy a more expensive car for the same monthly repayment amount that you can afford.

Appealing, yes? Well, before you set your heart on something shiny, with 4 wheels, that’s way out of your budget, there are a few things you need to know about balloon payments.

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What is a balloon payment?

A balloon payment, also known as a residual payment, is a percentage of the car’s value which has been removed from the sale price. It therefore reduces the monthly instalments that you need to pay to the lender. You will pay this lump sum at the end of the finance period.

The basic maths:

You need a car and find something functional and responsible that’s within your budget. But then, you see something shiny… Something pretty… Something worthy of everything you believe yourself to be.

How a balloon payment deal might help you afford your heart’s desire:

Your dream car = R500,000

10% balloon payment to be paid later = R50,000

You pay off in lower monthly instalments = R450 000

At the end of your finance term, you still owe the lump sum of R50,000.

There 2 kinds of balloon payments

You get 2 different types of balloon payments. The first is called ownership residual, which means when you buy the car, you are responsible for the lump sum at the end of the loan term. The second is called a non-ownership residual, and in this case, the bank still owns the car at the end of the loan period. They’re also responsible for reselling the car to cover the cost of the balloon payment, not you.

It’s super important to make sure that you understand which 1 you are agreeing to.

The pros

  • Balloon payment deals offer you short-term affordability.
  • You can drive a more expensive car than you could otherwise afford.
  • Your instalments will be lower over the finance period.

The cons

You must either pay a 1-off or re-finance (paying yet more interest and fees), which many people cover by selling the car.

  • It’s way more expensive in the long run: You will ultimately end up spending a lot more on the interest over the longer period of the loan, and because your balloon payment is subject to interest, you could incur even more charges if decide to refinance.
  • The lump sum at the end of the tunnel: You might think that in 4 or 5 years’ time your finances will be in a better state, but that’s not always true and when the time comes, you’re left scrambling to scrape together that last bit amount. Many choose to refinance the outstanding amount, which is subject to its own interest rate.
  • No equity in your car: You can also sell your car and use part of this amount to pay off the balloon amount. You then buy another car and enter into a new loan agreement. This way you never really own any equity in a car and will always have a vehicle finance instalment.

Refinancing the balloon payment

When you find yourself at the end of the loan period, there’s still 1 last mountain to climb. The balloon payment. The truth is that even though we think that we’ll be in a better financial position by the end of the loan, that’s not always the case. A path that’s open to cope with this payment is to get the amount refinanced.

The worst case scenario, however, isn’t scrambling to find the money for that balloon payment. It’s crashing your car before you’ve finished paying the darn thing off. Then you have payments but no car, with the looming balloon payment to rub salt in the wound.

That’s why you need affordable cover, decreasing premiums, and the freedom to choose your own excess. In short, that’s why you need the king. So, get a quote online, call their royal client care team on 0860 50 50 50, or pop the king an email at king@kingprice.co.za

This post has been sponsored by King Price Insurance.


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