Should you choose to have a balloon payment when financing a new car purchase?

Balloon payments have not been seen in a great light but are there any pros to consider in this article?¹

What is a ‘balloon’ or ‘residual’ payment?¹

The dealership’s finance representative may refer to a ‘balloon’ or ‘residual payment when considering your next car.’ The banks came up with a scheme that helps lower the monthly instalments. They remove a certain amount of the contract amount, leaving this as a ‘residual’ or ‘balloon’ for the client to pay off as one lump sum at the end of the 72 months. If you can’t pay it off immediately, you will have to take out another contract.

So why would you take on a ‘balloon’ payment?¹

The answer is an obvious one – namely, that the monthly instalments are lower. The sting is at the end of the contract, though, when you must immediately pay off a substantial residual. You don’t want to end up taking out another bank loan.

The big question – how do I settle the balloon payment at the end?¹

Instead of stressing about how you will find enough money to pay this amount, you can sell the car you ‘own’ to settle the balloon amount. But a word of caution – to get a good sale, and have enough money to pay for the residual, you need to look after your car. But what happens if you don’t get a good price for your car?

What are the cons of not taking out a balloon payment?¹

Although the bank allows you to sell the car to pay for the residual, you are not the car owner until you have done so. If you can’t settle the balloon payment, you have paid hundreds of thousands of rands without owning any car. You are deferring the ‘pain’ of paying off a car by having more manageable instalments for 72 months. But in the end, the crunch still comes. You also won’t be able to change your car after 3 years because you are ‘stuck’ with your vehicle for 72 months and a balloon payment.

Disclaimer

This article can only be used as information because car insurance is not straightforward. So, when you want to buy any car insurance product, be sure to first consult a certified financial advisor for professional advice.

Sources:

1. 1. Pros & Cons of the Balloon Payment