3 Cons Of Balloon Payment Finance

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kingr
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3 Cons Of Balloon Payment Finance

Post by kingr »

When buying a car on finance, many South Africans still opt for what is called a balloon payment on a financed car. In a nutshell, it means that a portion of the price of the car is left out of your monthly repayments, but you are still liable for the excluded lump sum amount at the end of your agreement term. At the end of the repayment term, you will then either pay the lump sum as a once-off payment with cash or refinance the amount by entering a new agreement with the bank or finance house, paying yet more interest and fees. It sounds fantastic, and clearly presents as such for many, making repayments far more affordable and the deal less of a stress.

Although it might be very “Jozi” to live beyond our means, the flip side to a balloon on a finance deal is sometimes less charming. There are two immutable facts pertinent to a modern working life - and certainly a motoring life in South Africa - and they always apply. Firstly, taking credit is sometimes necessary for big-ticket items like cars and houses, but it’s always inescapably a matter of taking money you don’t have. Some might be able to service their debt, but many can’t, as the alarming statistics on South Africans under debt management confirm. Secondly, the only people for whom credit will never become a trap are those who don’t really need it in the first place.

At the risk of spoiling the fantasy, credit should be treated like a virus - there to whittle down and exterminate, as we return to health! Looking at things that way, balloon payments on car deals are a dangerous temptation. If it’s personally important to you or perhaps even vaguely justifiable for business reasons that you drive the luxury sedan you can’t afford, you go and let no one shame you! But, if you’re more practical and honest about the fact that the floating balloon has to one day pop, you’ll want to look at balloon payment options on car finance very carefully before signing up.

The First Con Of Balloon Payment Finance: It’s Expensive
Make no mistake, since vehicle financing is governed as all credit is in this country by law, you can be sure that balloon payment financing is regular and completely above board. There’s no conning by the dealership - it’s you who ends up conning yourself! For one thing, it will take a lot longer to pay off the principal debt, as “parking” a lump sum basically falsifies the sense of “paying off” the car, as you are only paying off a portion of the car’s price, even if it is the majority.

Interest on capital being what it is, a balloon (final) payment is costing you over the long term, as well as costing you to settle it one day. Thus the first and most attractive con is a false sense of affordability. We’d all like to think “I can manage this!” or even “I deserve this!” and other bargains we make with ourselves in the moment, but that can’t be a motivation for a transaction that could backfire badly on us one day. Those who’d like a paid-up car one day to trade up, will admit that while everyone surely deserves a lovely car, the wise live strictly within their means. “Lovely” is a relative term, relative to how much you can afford. The loveliness of affordability is far greater than the loveliness of that luxury sedan or sports model you’re eyeing. A balloon payment might make you think “I’ve made it!” but it far too often rather says “I’ve made a mistake!”

The Second Con Of Balloon Payment Finance: It Tries To Predict Miracles
Those of us who care for a moment’s honesty with ourselves will admit, if we didn’t have the discipline to save up for the car in the first place, we’re very unlikely to save up to settle the balloon payment either. And since you are now earning as you’re earning, settling the balloon payment one day implies that you’ll shift positions, get a better job, or a giant Christmas bonus you hope will appear two or three years from now. The reality for many is that if you don’t have the cash to offset the car’s cost now, you’re very unlikely to have the cash to pay the last payment when it becomes due.

Trading on something miraculous to happen between now and balloon day might be very common - you can see it any Friday evening at a National Lottery outlet queue - but it’s unlikely to manifest as we wish. Implicit in signing for a balloon financing deal is a prediction that something else will happen to affect your financial status between now and then, when the balloon floats back for settlement. This is normally a false hope at best, and a delusion at worst.

There is another immediate noose around anyone on a balloon payment deal too. In the absence of settling the balloon payment outright, opting for balloon financing makes it very difficult to sell the car, as you will likely not be able to get out of the car deal after two years without taking a loss. Many obtain a car valuation at the end of year two or three, only to realise that the balance has tipped. What they can now sell the car for is less than anticipated, meaning they’ll sell to settle the debt, and be left with nothing. That’s a bleak vista and a far cry from the euphoria that often accompanies the signing up! “At least I looked good for two years!” is seldom any comfort when the car’s gone.

The Third Con of Balloon Payment Finance: Refinancing Options Are Limited
You should know that options to refinance the car when the balloon becomes due are limited. If you want to refinance the balloon amount when it’s due, in most cases it can only be refinanced by the bank or finance house that granted the original loan. If your credit status has changed for the worse or if you’ve had an erratic repayment history during the time you were repaying the car, the financer might very well decline you. The only options then are to sell the car to settle - quickly - or forfeit the vehicle, and neither are glamorous. And guaranteed, if you do refinance the car, you have overpaid for it. Ny the time you’ve finished paying a refinanced balloon payment, the car’s book value is the only relevant metric.

Related: I want to sell my car quickly


In dragging out payments by only addressing a portion of the debt, you’ll be paying almost double for your car by the time you settle the refinanced balloon. As it stands, the average fully financed car will cost you around 40 percent more over the fixed term. Refinancing a balloon amount only makes that worse. Often a lot worse. So the appeal of easy financing upfront can reclaim all of that glamour down the line, when you’re servicing debt at a premium for a now-aging car. The car will have lost the inherent value you need to be able to sell and maintain, much less sell and upgrade. Responsible lenders like Wesbank and others even post intel about this break-even point, pointing to just this phenomenon of depreciating car values.

How To Manage Balloon Payments
All doom and gloom aside, some people do actually know they’re coming into money at some specific point down the line, and there’s nothing wrong with allocating that to settle a balloon, if it’s a sure thing. Broadly, as long as a balloon payment is killed within two years, you’ve escaped the tightening noose. If you’re in year three and juuust maintaining a budget while a balloon lingers, it might be time to valet and sell the car, hopefully for a small profit, one that allows you to ease into your next car. Most of us won’t do this, however, not because we wouldn’t love a new car (!) and freedom from that balloon, but because if we want the most for it, it will probably take a while to sell. Unless you’re selling privately and can then still use the car on a daily basis, most of us can’t stomach the inconvenience of leaving the car at a dealership to get it sold on consignment.

Don’t be conned - by you! As strong as that tug at the heartstrings can be - we’ve all felt the magic of realising that somehow, anyhow, this gleaming beast before us can become our own - the pain of loss cuts deeper, and unfortunately lasts longer. Don’t forget, any hiccups in managing a balloon settlement will likely mean you won’t be eligible for car finance again, at least for a inconveniently long while.

Be honest with yourself about the implications of a balloon payment. And there’s a really useful aid to honesty when buying a car on finance with a balloon payment attached… if you don’t know precisely how you’re going to settle it when signing up for it, don’t do it!
Kurt #3337

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