Durban - Want a car you can’t really afford? The motor finance industry has just the thing - a balloon payment deal. So instead of spreading your installments over your finance period - five years, say - the car finance bank carves off a big chunk of the total amount owing, and “parks” it until you’ve spent five or six years paying off the amount you can actually afford.
In other words, you get to pay a much lower instalment during those five years, while driving a car you couldn’t otherwise afford. But then you face a lump sum “balloon” payment after those 60 or 72 months, which you must either re-finance - 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 or six years previously, they weren’t made aware of the fact that it was a balloon finance deal, so the final payment came as a nasty shock.
Of course, when I take up these cases, the dealership invariably denies any wrongdoing on the part of the salesman or finance person, and insists that the details of the balloon payment were fully disclosed and explained. And as these deals are negotiated in person, neither party has any proof of what was and wasn’t said at the time.
All that’s left is the signed contract.
About those contracts… To my mind, a contract pertaining to a balloon financing deal should make this fact abundantly clear to the consumer. The financial implications should leap out of the page: monthly instalment, number of months it must be paid for (72 months seems to be most common, currently) and then that one big last balloon payment.
That section should be bigger and bolder than the rest, and the consumer should be made to sign right next to that balloon amount. Surely? Well, that seldom happens.
The Absa instalment agreement which Sandesh Singh of Chatsworth, Durban, signed at Hyundai Pinetown in December reveals the monthly repayments amount over 72 months in one box and the “final amount” three lines below that, all in the same tiny font.
The words “balloon” or “residual” - commonly used to describe such deals - do not appear.
This does: “Details of how the amount of repayments differ (if not equal) Final Payment: 128 220.00.”
Yes, R128 220 would be owing on a R444 500 Hyundai ix35 SUV, after Singh had paid R6721 for six years, which would bring his total repayment - assuming he paid that R128 220 in a lump sum, without interest - to R605 474.
Only when Singh queried that big balloon sum did the dealership send him the contract, this time with an asterisk on either side of that key “final payment” section. Pity they didn’t put them there at the time of signing.
Most people, of course, wouldn’t have a lump sum to pay, which means financing that large amount.
Singh said when the deal was being negotiated, he focused only on the R6721 monthly payment, and agreed to the deal, thinking he could afford that. It was when he got his first account statement from Absa last month that he realised, for the first time, he says, that he’d signed a balloon deal.
In the statement, under “Financing Details”, the financed amount appears, with the current instalment amount – R6763 – under that, and, below that: “Residual Value: R128 220.00”. It’s worth noting that on the agreement Singh signed, that amount appears thus: “128 220.00”.
That rand sign and that space attract the eye as a monetary amount far more than “128220.00”, don’t they?
Singh has since had the deal restructured to do away with that hefty final payment, with the result that his monthly installment has ballooned by R1337 a month to R8100. He insists that neither the two salesmen he dealt with, nor the bank finance rep, told him that he was signing a residual contract.
“I told them I had a specific instalment budget; they came up with R6763, with a prime interest rate, and that was that,” Singh said. “When I told the salesman later about it being a balloon deal, he seemed surprised.
“Now this increased monthly instalment is giving me sleepless nights. I am trying to see how I can cut my expenditure so that I can afford it.”
I approached the dealership for comment on Singh’s allegation of misrepresentation.
Responding on behalf of Hyundai KwaZulu-Natal, regional finance and insurance manager Prishen Ghandhi said the finance manager in the Pinetown dealership had “quoted him verbally with different instalments, over different periods, with and without balloon payments”.
“Once an instalment had been reached that was to the client’s satisfaction, she submitted an electronic form to the banks, requesting the agreed payment structure on the application form.
“The quotation also reflects the instalment, period, interest rate and balloon payment as agreed upon.”
I see no reference to the balloon payment in the quotation.
As for the instalment agreement itself, Ghandhi said Singh had signed every page of it.
“We hold that our manager performed her duties correctly within strict protocols required by the Financial Advisory and Intermediary Services Act and that all advice given and procedures followed were transparent and open.”
Next, I approached Absa, questioning the fact that neither its quotation or instalment agreement headings included the words “balloon” or “residual”, and that the financial implications of the deal were not highlighted so as to be “unmissable” by consumers.
Commenting on the issue of consumers unwittingly committing to residual deals, in general, I wrote: “It is my contention that (such) documentation plays into the hands of unscrupulous salespeople.
“It is vital that customers always read their vehicle finance documentation very carefully to understand such deal structures before they sign.”
An Absa spokesman responded: “A balloon payment can be a useful tool to enable customers to purchase a vehicle at affordable monthly instalments, but it is important to understand how these deals are structured and what it means before entering into any agreement.
“The vehicle dealer engaged the customer and acted as our agent in terms of the National Credit Act, and has a responsibility to advise the customer about the balloon payment arrangement at the end of the period.
“Absa continually communicates with dealers to clearly explain to customers the contents of the loan agreement, while the residual value (balloon payment) and its due date is displayed in all Absa monthly customer statements.
“As we do with all disputes and complaints, the above matter will be investigated and our documentation will once again be scrutinised to ensure that we act in and protect the best interest of our customers in order to make their lives much easier.”
Protecting consumers should involve a radical redesign of their quotation and instalment agreement forms, in my opinion.
It simply is not the case that they currently make it abundantly clear that a relatively large final payment is due after five or six long years of paying the car off. At the very least, such deals should not be processed without the signature of the consumer next to that balloon amount. And it should be expressed as a rand amount, with the appropriate spacing.
That goes for the residual deal documentation of other banks, too. There simply can be no justification in not doing so. Meanwhile, it’s up to consumers to protect themselves.
WHAT TO DO
There is no record of a company representative’s verbal declarations and assurances, which leaves you without proof in the event of a dispute. So, before you sign anything, either record such conversations with your smart phone, or insist that the deal on the table be e-mailed to you, not as a contract, but in plain language.
As it is spoken.
And when it comes to the contract, read absolutely every word of it, paying particular attention to the bits in the tiniest font. They are usually the ones that will have the biggest impact on your finances. This has nothing to do with a residual deal, but be wary of contract add-ons that aren’t discussed, but simply added to the purchase price of a vehicle on the quote and agreement.
Don’t just accept this add-on - negotiate
In this case, a whopping R4332 was added to the cost of Singh’s vehicle as a “service delivery fee”. This on a new car. It’s become standard practice by dealerships as a means of boosting the profit margin on the sale. The cost of a tank of fuel, along with a fee to cover number plates, registration and licensing, are justified as extra costs - the rest is not, in my view.
Start by asking the dealership to break it down. The bulk of that amount should be added, transparently, to the advertised cost of the car and not snuck in as an extra fee.