The truth about vehicle finance balloon payments
13 February 2023: When it comes to vehicle finance, balloon payment deals are possibly the most commonly misunderstood of all installment-type payment options. WesBank, a leader in South African vehicle and asset solutions, offers some clarity on the subject along with some advice for consumers considering a balloon payment for their next car purchase.
“When taken at face value, balloon payment deals may seem like an easy way to drive a car you simply cannot afford. You’re basically taking an amount owed on the purchase price of a car and setting it aside, in turn making monthly instalments lower because they are calculated on a smaller initial debt owed to the bank,” says Lebogang Gaoaketse, WesBank’s Head of Marketing and Communication. “It’s important to remember, however, that the amount set aside at the start of the deal is still the buyer’s responsibility and will need to be settled.”
So, what is the benefit associated with balloon payments?
Balloons are designed to help ease the burden of monthly expenses, but the luxury of lower repayments every month does come with a great deal of responsibility for the buyer. When used correctly, the money saved on repayments should more than cover the costs of a loan needed to refinance the lump sum of debt at the end of a balloon term. Put simply, customers should aim to reserve the money they save every month in order to make settling the outstanding amount owed on a vehicle easier after years of driving it.
“There is a big difference between being able to afford driving a car and being able to afford owning it,” says Gaoaketse. “We advise WesBank customers to consider much more than only monthly repayments when calculating vehicle finance affordability. While installment amounts may seem like the bottom line, other responsibilities such as fuel, insurance, tyres, regular upkeep, unrelated living expenses and, in the case of balloon payments, that all important lump sum owed also need to be taken into account when looking at affordability.
“Extremely responsible budgeting is key to maximising the benefits of a balloon deal, so if you know you might struggle with saving money every month, then this option is probably not the best one for you. It’s also important to not see a balloon payment as an alternative to a deposit put down at the start of a loan. A healthy deposit on a new or used car will always make your financial road an easier one to travel, as repayment costs and the deferred balloon debt will be lower.”
WesBank also advises motorists considering balloon deals to familiarise themselves with the term ‘breakeven point’. A breakeven point occurs when a financed vehicle’s trade-in value falls in line with the amount still owed to the bank. Depending on the finance deal structure, a breakeven point may come sooner or later during your term, with sooner always being the goal. By nature, balloon payments will push your breakeven point to a later date within a loan period.
“Breakeven points are critically important to understand,” says Gaoaketse. “South African drivers have an unhealthy tendency to upgrade their vehicles and enter new finance deals more often than is financially viable. Rolling outstanding debt into a new purchase, or in other words, paying off a portion of your old car while driving your new one is a dangerous trap to fall into. Irresponsible buyers who do this multiple times can not only push their breakeven point very far out of reach, but in extreme cases can owe the bank an amount that is more than what their asset, or car, will ever be worth. WesBank strongly advises keeping monthly repayments, the value of a current car, and balloon debts evenly balanced.”
WesBank offers a range of useful tools and calculators designed to answer your vehicle finance research questions. The newly launched WesBank App enables you to find out how much you can expect to get for your current car, work out what car you can afford, apply for vehicle finance and get approval in a matter of minutes, or calculate the monthly repayments on your dream car.
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