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Balloon payments blow up in one's face

Car financier WesBank announced this week that the number of South Africans who opted for balloon payments when financing their vehicles had dropped dramatically in the past four years - from 22 percent of car buyers in July 2007 to just 9.5 percent in June 2011.

A balloon payment - also referred to as a residual - is “an agreed inflated final payment of a loan that is paid in full at the end of the loan agreement”.

Essentially what this arrangement does is enable someone to live beyond their means - it lowers the monthly repayment to a sum a person can afford, prolonging the pain of a big final amount to be paid at the end of the repayment term.

Some first-time car buyers focus only on the monthly instalment, and fail to grasp the significance of the balloon payment.

And before the National Credit Act (NCA) forced credit providers to go big on disclosure in mid-2007, many consumers were not properly informed about how a balloon payment deal worked.

The result was that, just when they thought they’d paid off their car, they were alerted to the outstanding balloon payment, and in many cases they didn’t have the cash and their credit status had diminished to the point that they couldn’t finance it, either.

The NCA did a lot to protect consumers from walking “blindly” into a balloon deal, making it compulsory for this large “final payment” to be highlighted in advertising.

According to Chris de Kock, head of sales and marketing at WesBank, the movement away from balloon payments indicates that local consumers are becoming more aware of the structure of their finance deals as well as demonstrating better credit sense by buying within their means.

“The introduction of the NCA in June of 2007 has also been a major factor in the steady drop in balloon payments,” De Kock explains.

“The NCA allows for longer-term contracts and customers, who would have purchased with a balloon payment in order to make their dream car more affordable, now have the option of paying the vehicle off over a longer term without a balloon payment, where the repayment is roughly the same.”

So whereas the average contract period pre-NCA was 50 months, it is now 66 months.

De Kock warns that a balloon payment will take longer to reach “break-even”, which is the point at which the amount owing on a vehicle is equal to what the vehicle can be traded for.

“For example, a vehicle financed over 72 months with no balloon payment would break even at 44 months; but with a 20 percent balloon payment it would only break even at 58 months,” he said.

“Also, a vehicle financed over 72 months with a 10 percent balloon payment will increase the consumer’s interest cost by 8 percent.”

That’s quite a whack.

Clearly, many consumers don’t have the final lump sum available to make that final payment - De Kock says about 65 percent of WesBank’s customers on balloon payment deals ask for that final payment to be refinanced.

I’ve had quite few e-mails this year from people who signed balloon payment deals in 2006, before the NCA kicked in, and claimed to be oblivious to that large final payment requirement until this year, when they thought they’d paid off their cars in full.

“I bought a vehicle from a dealership in 2006 and it was financed,” wrote Phumzile. “It was supposed to be paid up on January 25, but the problem is I was told that I have to pay a residual amount of R34 000, which I don’t have.”

Bongani wrote: “I am in a dilemma here. I bought a Toyota Yaris sedan in 2006 and for some reason, probably my stupidity, I signed for a residual of R30 000.

“The end of the term is getting closer and there is no way I can raise that money. My worry is I might lose the car.”

Many want to refinance the balloon payment, but no longer qualify for a loan, so they are forced to sell the car to settle the debt.

Fazel went under debt review while paying off his car, and at the end of his four-year repayment term, he didn’t have the R52 800 balloon amount. And given his debt review status, he was barred from borrowing money to pay it.

Bottom line - read your car finance documentation very carefully before you sign, paying particular attention to the repayment section, specifically any reference to a final payment. Try to avoid a balloon payment deal if possible. - Pretoria News

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