Often an enticing option when it comes to financing your dream car, opting for a so-called balloon finance package requires careful consideration.
One of the most expensive assets you’re likely to purchase, the allure of owning your own personal transportation remains strong, especially in a country where public transport options are too often unreliable. Like many South Africans, the only realistic way of getting behind the wheel of your own car – bought new, pre-owned or at auction – is via a tailored finance deal that allows you a considered amount of time to cover the listed asking price.
Also known as a balloon option, a residual payment plan is often an enticing way of ensuring that your monthly repayments remain manageable. Offered by most finance houses, the intricacies of this type of plan essentially means that you to shift the expense of a deposit on your new car to the end of your finance deal, as opposed to paying this up front. The potential disadvantage to this is that you need to ensure that you’re able to make this final payment when the time comes.
Determined via a considered set of criteria and broadly dependant on an individual customer’s credit rating, this balloon payment plan can include an up to 30% residual on the purchase price of the car. This means that monthly repayments are instead based on a significantly reduced asking price, with the balance of this total shifted to the end of the payment period.
Based on a R300 000 purchase with a 10% residual (balloon), this means that your monthly payments are calculated on R270 000, with the balance of R30 000 due on completion of the contract term.
“The balloon approval amount is determined by the credit provider, considering the customer’s approval criteria, affordability and the vehicle purchased,” says Deline Olivier, Group CEO of Auction Finance. “A balloon payment deal requires discipline. It’s advisable that the customer manages his/ her cash flow and continues to save during the finance term, making provision for when the balloon payment is due.”
One option available for those left with a sinking feeling once that final payment is due is the potential to refinancing this amount. Based on a smaller total and with a hopefully favourable credit rating, the interest rate on this new deal should be lower than the one just completed. Downsides, however, include the potential of fees and calculated penalties, as well as the very real chance that on completion of this new deal, you’ve spent more on your car than it’s now worth – meaning you’re unlikely to recoup your capital outlay should you choose to sell it on.
A motoring journalist with more than 20 years’ experience, Ian McLaren will be compiling a series are articles documenting his learning curve when it comes to all things auction. Find him on Twitter, Instagram and TikTok at @IanMcLaren76.
These articles aim to offer insights only and in no way encourage reckless or hit-and-miss purchasing decisions.