Beware balloon payments

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ST_audi0_COUNTRY_E1 REUTERS Rather go for a less flashy car than face a hefty balloon payment at the end of your finance period, advises the writer.

Want a car you can’t really afford? The motor finance industry has just the thing – a balloon payment.

So, instead of spreading your instalments over your finance period – five years, say – you defer some of that lump sum to the end of your finance period.

This allows you to pay a much lower instalment during those five years, while driving a car you wouldn’t otherwise afford. But then you face a lump sum “balloon” payment after those 60 months, which you must either refinance – paying yet more interest and fees – or pay in a lump sum, which for many people means selling the car.

It’s a hefty price to pay for keeping up appearances.

To make matters worse, many consumers have told me that when they signed their motor finance deals five years previously, they weren’t made aware of the fact that it was a balloon finance deal, so the the final payment came as a nasty shock.

Finance agreements reveal what is termed a “final payment” due after 60 months, but in most cases this information does not leap out of the page in large print, and consumers being notoriously disinclined to bother themselves with a contract’s small print, it’s not inconceivable for someone to miss it.

Especially if the finance consultant in the dealership glossed over the balloon bit, and the buyer was too entranced by the new wheels to pay much attention or ask too many questions beyond the immediate monthly instalment due.

I recently took up one such case. The couple bought a new Audi from a Joburg dealership in 2007, having traded in their six-year-old Audi. The deal was financed in the name of the wife’s property business, and the monthly instalment was R1 800.

When the wife’s business collapsed three years ago, the husband took over the repayments, and not one was missed or short-paid in five years. But just when they thought the car was totally paid off, Wesbank notified them that they owed R81 000 as the “final payment”.

They approached me for help, and I asked Wesbank whether it would consider refinancing the residual amount, in order to spare them having to sell the car and suffer the resultant losses.

Responding, the bank pointed out that the agreement schedule had “clearly indicated” the amounts owing and the dates, and the balloon amount had appeared on all statements.

But given the couple’s past commitment to paying their instalments despite their financial difficulties, Wesbank said, it would agree to “exceptional approval” of finance in the name of the husband, to be concluded as a private transaction through WesBank Private Finance, due to the fact that there would be a change of ownership of the asset.

Almost every advert I see or hear for new cars mentions a balloon payment – as required by the National Credit Act – which got me wondering what percentage of current car finance deals are “balloons”. A year ago, Wesbank issued a statement saying that the number of South Africans opting for balloon payments when financing their vehicles had dropped from 22 percent in July 2007 to just 9.5 percent in June last year.

So I asked the bank whether that trend had continued. Turns out it hasn’t. The number increased to 11 percent in April this year, Wesbank said, but the average balloon amount had dropped slightly from 16.6 percent of the cash price to 16.4 percent. The percentage of balloon deals is about 12 percent with Standard Bank, and 13 percent with Absa.

In the case of Nedbank’s vehicle financing division, MFC, that figure is somewhat higher. About 20 percent of all cars financed so far this year have balloon payments.

It’s a risky deal, given that a lot can happen in five years, as with the Wesbank couple.

You could well find yourself unable to refinance the balloon amount because of a bad credit record, and be forced to sell your car to pay the amount.

Rather settle for a less flashy car that you can afford to pay off every month, without deferring the payment pain.

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