It’s a brand-new month and we bring you a new feature, Ask Mabs, that will run every Wednesday.
Our founding publisher, Mabuyane Mabuza– a veteran motoring journalist and Chairperson of the South African Car of The Year (COTY) – will share her expertise gained for nearly 20 years in the industry and answer your burning questions on anything relating to motoring and owning a car.
Please share your questions on any of Xploreza’s social media platforms or email [email protected]
In the quest for knowledge, there are no such things as stupid question. And don’t worry – no one will know it was you who asked a question.
Dear Mabs
I’m a first car buyer and I’m excited about leaving public transport and having my own car. I’ve been looking for a few weeks and have been turned down by various dealerships owing to affordability. It turns out I earn too little to afford the car I want, and I also don’t have a deposit.
I heard of a dealership that has helped many people in my situation and went to inquire. The salesman looked at my income and assured me that I qualify for vehicle finance with a balloon payment at the end of the payment term. He was pushy and wanted me to sign without explaining how this balloon worked. I asked for time, and he told me the deal will be off the table in 48 hours. I’m desperate for a car but I want to know what I’m getting myself into. What exactly is a balloon payment?
Mabs:
Congratulations on your move to shop around for your first car.
Adulting comes with all sorts of responsibilities – some are great, but there are pitfalls and even spectacular failures.
I am glad that you walked away and were willing to take time to gather information and empower yourself before signing on the dotted line and getting into a trap.
Throughout my nearly 20 years career as a motoring journalist, I have seen many people fall prey to pushy vehicle salesmen and sign binding loan agreements for cars they could not afford.
It is sad that in 2023 people still fall into this trap despite the laws that are in place to protect consumers.
When you don’t have cash and consider going the bank finance route, like most people, the first step is to conduct thorough research before you even step into the showroom. In fact, go as far as getting pre-approval from different banks. This exercise will help you to work out how much you qualify for, to be aware of the interest rate you will be charged, the monthly repayments as well as the loan repayment duration. Also, shop around for insurance estimates because it is compulsory to insure a car financed by a bank.
Bear in mind that all these payments will be made before you can fill in fuel in your car. This exercise will assist you to determine if you can really afford the car without pressure from a salesperson who is desperate to make commission from the sale.
Now let me unpack balloon payment and its implications on your car finance.
What is a balloon payment?
A balloon payment is a lump sum payment due to the financier at the end of the loan term. Say you pay off your car loan for 60 months, at the end you will likely be left with 20% to 25% of the loan that you are expected to pay off in a lump-sum or look to refinance.
Is it worth it?
This type of finance method automatically reduces your monthly installments. At face value, might seem like a great idea. But there is always a catch.
Most often, this is a disastrous deal. A lot of information is hidden in plain sight. I assure you; it always ends in tears.
What compels a customer to sign on the dotted line for a balloon payment?
The answer is simple, lack of discipline and experience on the part of the consumer.
The car salesperson is not your friend! They are there to sell you a car. He/she will confuse you with legalese and tell you only “wonderful” things about the car and how cheap they can give it to you for.
Also, you may end up paying more interest and fees with the balloon than without. The declining value of the vehicle may leave you with a huge gap between the outstanding value of the loan and the market value of the vehicle. This means a greater risk should you have an accident or lose the vehicle.
Think about where the funds to pay for the final balloon amount will come from. It may be from savings, a bonus cheque but you will most likely have to refinance the balloon amount, which further extends your repayment terms and means more interest and you are stuck with an outstanding balance which is higher than the actual value of your car.
Conclusion
The message is simple, do not get tempted into entering a balloon agreement with the hope that your financial fortunes will have changed in five years. It is not possible to pay off up to 25% of the cost of your loan, with interest. Unless you win the lotto or get a windfall, walk away and consider other options. Perhaps those dealerships that told you don’t qualify were doing you a favour. There is nothing worse than having to leave your car at home and catch a taxi to work because you cannot even afford to put fuel in, and the monthly repayments are strangling you.
