{"id":589608,"date":"2022-05-29T11:00:25","date_gmt":"2022-05-29T09:00:25","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=589608"},"modified":"2022-06-03T07:59:28","modified_gmt":"2022-06-03T05:59:28","slug":"what-you-car-loan-looks-like-with-and-without-balloon-payments","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/motoring\/589608\/what-you-car-loan-looks-like-with-and-without-balloon-payments\/","title":{"rendered":"What your car loan looks like with and without balloon payments"},"content":{"rendered":"

Balloons normally conjure up images of birthday parties, happy times, and harmless fun. A balloon payment on a vehicle finance agreement, on the other hand, can potentially cost you a lot of money and destroy long-term wealth, writes Johann Rossouw of consumer financial education website, SmartAboutMoney.<\/a><\/p>\n

It is critically important to understand what a balloon payment is, how it works and the potential consequences of taking a balloon payment on your vehicle loan.<\/p>\n

The aim of a balloon payment is to make the monthly repayments on a vehicle loan more affordable for you. You can think of a balloon payment as a lump sum that is payable at the end of your loan term.<\/p>\n

With and without balloons<\/strong><\/p>\n

To illustrate this by way of an example, suppose two friends \u2013 Sam and Sam’s Bestie – buy the identical car \u2013 costing them R400,000 each.<\/p>\n

Sam and SAM’s Bestie both take out vehicle finance*, but Sam’s Bestie opts for a balloon payment of 20% (or R80,000) of the price of the vehicle.<\/p>\n

Sam’s monthly repayments over the five-year period will be R8,500, while Sam’s Bestie only pays R7,500.<\/p>\n

Sam’s Bestie feels pretty chuffed with R1,000 extra to spend every month. At the end of the five-year term, however, Sam will owe nothing on the car, while Sam’s Bestie will still owe the balloon payment of R80,000.<\/p>\n

At the end of term, Sam’s Bestie will have paid approximately R18,000 more for the exact same car as Sam – see table.<\/p>\n

There is more to consider when it comes to a balloon payment. Let\u2019s assume Sam’s Bestie does not have R80,000 available to settle his balloon payment at the end of the five-year term.<\/p>\n

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Sam’s Bestie’s bank graciously offers to extend his loan for another three years. This will, however, cost R2,700 per month \u2013 meaning Sam’s Bestie has paid almost R625 000 for a car that cost R400 000 eight years ago.<\/p>\n

The real gut punch for Sam’s Bestie, however, comes when the loan is paid off and the car can be sold.<\/p>\n

After eight years of depreciation, Sam’s Bestie’s car is now only worth R170,000 \u2013 which means effectively a loss of R455,000 over the eight-year period.<\/p>\n

Sam’s car will also depreciate, but he will have a paid-up car a lot sooner than Sam’s Bestie.<\/p>\n

How to pop the balloon<\/strong><\/p>\n

There is, however, hope for Sam’s Bestie and people who find themselves in a similar situation. If you currently have a balloon payment, the most-effective ways of popping the balloon are to follow one of the following tactics:<\/p>\n