Balloon payment warning for car buyers in South Africa

South Africans are turning to balloon payments as many battle with affordability caused by high interest rates, but many are unaware of the potential pitfalls and may end up paying off their cars for longer than initially planned.

Standard Bank said that a third of its customers have included the maximum balloon payment over the last year.

“Given the current cost of living crisis and the 15-year high interest rates in South Africa, consumers are looking for more ways to stretch their budgets,” said the Head of Standard Bank VAF Enablement, Glenn Stead.

“High fuel costs have added to consumer strain by pushing up vehicle ownership costs significantly in the past three years.”

The bank’s data reveals that new vehicle purchases, including balloon payments, have jumped by 41% over the past five years.

A balloon payment functions like a deferred debt that consumers can opt to move to the end of their contract. 

Instalments are then calculated based on the principal debt minus the deferred debt portion.

Stead, however, warned that many consumers don’t fully grasp how this type of deal will affect them.

At the beginning of the contract, the customer will know how much they will need to pay in the last instalment.

When the time comes, they can pay off the balloon in cash or enter into a new agreement to re-spread the payment. This usually requires a customer to apply a month or two before their last repayment.

As the re-spreading is a new agreement, consumers could end up spending an additional one to three years paying off their balloon payment.

Thus, they will only take full ownership and receive the original eNATIS documents once the full balloon amount is settled.

“That’s why you need to think ahead when choosing to take a balloon payment. However, re-spreading can have its benefit. Consumers can choose to keep their repayments slightly lower than their current instalments,” said Stead.

Use a trade-in

Consumers can still make additional non-contractual payments towards their VAF accounts, but they must explicitly state these payments are being used to offset the balloon amount.

The additional amounts will then be directed towards the principal debt, and the balloon payment will not be affected.

Another option, 96.5% of Standard Bank VAF customers who had a balloon used, is to trade in their vehicles before the balloon matures as part of their replacement cycle.

“When this happens, the balloon is settled as part of the trade-in process. Thus, only 3.5% of our customers have had a balloon that required settling or re-spreading,” said Glenn.

Balloons cost more in the longer term

A balloon payment will then raise the total amount the consumer will pay at the end of their financing term.

If a customer buys a R200,000 vehicle at a 10% interest rate and opts for a 20% balloon, they will pay R10,000 more after six years.

This is because while the consumer pays interest on the principal debt, no payments are made towards the balloon amount.

However, the interest on the balloon amount is also charged from day one.

“If you don’t want higher interest to accumulate on your balloon portion, you can make additional ad-hoc payments and ask your lender to allocate those towards the balloon,” added Stead.

Risk profile

Balloon payments are also expressed as the percentage of a vehicle’s total purchase price, excluding additional warranty or service plan costs.

The majority of banks allow up to a maximum of 40%. Still, not everyone will qualify for this maximum due to your qualification criteria considered part of the consumer’s overall risk, including factors like age and vehicle make.

“In Standard Bank’s VAF’s case, the only time we can approve a balloon payment over 40% is when the initial financing period is short – 24 months or lower,” added Stead.

“We also look at the customer’s affordability score and the car being financed. Where the car depreciates far slower than the typical vehicle that we finance, we may approve a balloon payment over 40%.”

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