How does Balloon Payment work in South Africa? List of Pros and Cons
When in search for options for financing, balloon payment tends to come to mind. How does a balloon payment work in South Africa? This main question pops up in our heads when we are trying to figure out if it is the option for us. In this article, this question and more doubts will be cleared out regarding loans and balloon payment.
What is the maximum balloon payment on a car?
This is a frequent question and it depends on certain factors that may affect balloon payment on a vehicle. There isn’t a universal or maximum balloon payment but it actually depends also on the company that provides it. They are meant to lower the vehicle’s cost per month. However, the vehicle loan will not be cheaper. There are plenty of risks involved too, so if you are thinking of accessing this option, you should know all the information possible. Your vehicle, for instance, could be repossessed. You can compare vehicle loans with our loans calculator.
Do you pay interest on a balloon payment?
Whenever you decide to go for balloon payment, you will see that you will have to pay more interest on the loan. This is because of the fact that the client is paying an interest on the balloon payment’s value for the whole loan’s term. What you should know about interest is the following:
-Interest is higher though your monthly repayments will lower down
-Your updated credit profile will have a direct impact on your interest rate, especially when you are refinancing this type of payment
-Throughout the loan, the outstanding balance of the principal may be higher which will increase the interest charged because of lower repayments per month.
Which are some balloon payment options?
As it was previously stated, balloon payment consists in one large payment that will have to be paid by the end the loan after monthly payments that are smaller. Balloon payments may be included in some vehicle loans in order to lower the initial costs per month without lengthening the term of the loan. They are quite usual on auto leases too. When it comes to finding balloon payment options, Wesbank in South Africa, for instance, offers:
-Refinance: you get to pick monthly installments. This is a new agreement
-Trade- in: you can trade your vehicle and cover the payment of the balloon with the value of trade-in.
-Once-off payment: you get to pay all the balloon payments by settling it at the end of the term of financing.
Is a balloon payment good or bad?
Balloon payment for some people can be quite a solution. It allows clients to afford monthly payments and it can be a faster solution to acquiring the vehicle you always wanted. For others, it only implies risks and potential financial stress. Interest can pile up, creating higher debts. The advantages and disadvantages will be explained below.
Which are the pros and cons of a balloon car loan?
For some, balloon payment has more disadvantages than advantages while others believe the opposite. Let us explore the benefits of having balloon payment:
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You can negotiate balloon payment: it is, in general, a flexible deal and it can be set at the moment of the negotiation of the loan contract. Depending on the loan, you will have a particular standard payment.
Clients can build up their savings in different ways: they can find out the payments in advance, which allow clients to save money before even the beginning of the loan.
Clients can reduce the payments carried out per month. This is one of its main benefits that can take advantage of. Monthly payments stay more affordable this way.
Lets us now explore the negative side of balloon payments:
Clients can find themselves tangled in more and higher debts. If they fail to save the money they needed for the balloon payment, they can find themselves refinancing the loan and taking higher debts with higher interest to pay.
Clients may risk repossession. If clients are unable to afford a final payment or lack the credit to refinance, they may be in trouble with repossession.
This deal could be much more expensive than other options, since though your payments may be lower, you will have interest payments that are higher because you will pay off the balance in slow pace.
What is the difference between residual and balloon payment?
Balloon has already been explained, so let us explore what residual payment means. Residual payment refers to the residual value of a light commercial or vehicle as en estimate the asset’s value at the end of either its useful life or its finance lease. The residual value will lower as long as the lease period of an asset is longer. If you decide to lease an asset, the residual value will have an effect on the obligor’s cash flow during the lease term. It is also known as RV and they are generally represented as a percentage of the cash price value of the goods. This option is optional and you get to choose whether to include it.
Can you get car finance with no balloon payment?
Yes, this is always a possibility since balloon payment is not compulsory but an option. You can choose regular car finance by asking for car finance with a number of payments set at a particular rate. This is generally given by a company, which will ask you for personal details and which will evaluate your credit profile and particular situation to offer a better financial deal.
Can you get a balloon payment on a second hand car?
Yes, balloon payments are possible for both second hand cars and new vehicles. The rules are the same as with new vehicles, that is, you will have to pay a sum that could be quite large in order to complete the vehicle’s purchase.
In conclusion, getting the vehicle you desire is a possibility and making use of a balloon payment is another option. Just remember to evaluate the benefits and disadvantages before making a choice. If not, you can look for different bank loan options.
Questions and answers
What happens if at the end of your loan term, you are not able to pay your balloon payment and decide to take another car?
If at the end of your loan term, you are not able to pay your balloon payment, the option is to refinance the loan again, or you will also have the chance to sell the vehicle. You could also trade in your car at a dealership and replace it with another one. This trade-in value will be used to cover the balloon payment.
Is a percentage balloon payment calculated on the retail price of the vehicle or on the actual purchase price?
A balloon payment consists of a percentage related to the actual purchase price of a vehicle. It is important to calculate the total price of a car, and sometimes, the balloon payment can represent a 20% of it. This amount of money will typically be paid in one lump sum once the contract period finishes.
Which bank in South Africa offers this option?
Wesbank is one of the company that offers balloon payment
Can I have balloon payment with a new vehicle?
yes, both with new and used vehicles
Could I pay lower interest with balloon payment?
Unfortunately, with balloon payment you will pay higher interest