Car finance - should you take a balloon payment?
It’s 2023 and vehicles have become increasingly costly to purchase, what R200 000 could get you ten years ago will only allow you access to a basic entry-level car. This is one of the reasons that financial institutions have become smart over the years, offering consumers finance deals that allow them access to vehicles they wouldn't ordinarily afford. You may have heard of the terms ‘residual’ or ‘balloon payment’ - in this article we’ll break it down and discuss the pros and cons of this payment plan.
What is a balloon payment/residual?
A balloon or residual payment is part of a repayment plan agreed upon between you and the bank or financier. It allows you as the buyer to pay a lower monthly instalment for your vehicle over the repayment term, an option which gives buyers access to vehicles that they may have struggled to afford. However, at the end of the payment term, there is a lump sum that you will be liable to pay.
Let’s assume that you’re purchasing a vehicle for R200 000 and you opt for a residual of 10 per cent. Your monthly repayment will be based on R180 000 including interest. The remaining R20 000 will be payable at the end of your financing term. Simply put, should you wish to own the vehicle at the end of your loan term, you’ll have to pay the bank the R20 000 residual/balloon payment. This amount can be settled in cash or refinanced. The latter will pull you back into debt just when you thought you were home-free.
Pros and cons of a residual contract.
It allows you to pay a lower monthly premium.Gives you access to a more expensive car for a lower monthly repayment.A deposit is generally not required.
Taking a residual means you have additional debt waiting for you at the end of your loan term.You may be stuck in a debt cycle should you need to finance your balloon payment.You may be forced to sell your vehicle to repay the owed residual.
Taking a residual payment isn’t always the best option for everyone, and many will advise you to stay away if at all possible. It could work to your advantage if you’re good at saving money and can put away enough to settle the owed balloon amount in cash at the end of your loan term.
Gugu Masuku - In proud association with CHANGECARS.