How much a new car really costs – With and without a balloon payment

You’ll pay anywhere from R3,067 to R122,691 more for a new vehicle over the course of a finance agreement if you choose a deal with a balloon payment.

A balloon payment works like a deferred debt that consumers can opt to move to the end of their contract to reduce the monthly ownership costs, and the finance instalments are then calculated based on the principal debt minus the deferred debt, said the Head of Standard Bank VAF Enablement, Glenn Stead.

However, it comes with its fair share of downsides.

A deferred-debt deal puts you on the hook for a massive lump sum payment at the end of your credit contract, it extends your “break-even” point which is the point at which your outstanding debt is equal to the trade-in value of your car, and it can see you pay off a vehicle for much longer than you initially planned on.

Despite these risks, data from Standard Bank shows that in the face of the current cost-of-living crisis, South African consumers are increasingly opting for balloon payment contracts when purchasing vehicles, said Stead.

Over the past five years, the bank has experienced a 41% increase in new vehicles being financed with a deferred-debt contract. In the last year alone, as much as 33% of Standard Bank customers opted to include the maximum balloon payment of 40% on their credit agreements.

The rands and cents of a balloon payment

Your monthly instalments may be more palatable, however, you will end up paying a larger total sum at the end of the contract than you would have if you opted to finance a vehicle without a balloon.

This is because while you pay interest on the principal debt, there are no payments made towards the balloon during the contract duration, though interest is charged from day one on the balloon, too, as per Standard Bank’s Stead.

“That’s why you need to think ahead when choosing to take a balloon payment,” he said.

The below table illustrates the total amount you will pay if you finance a new car with no deposit at the current prime interest rate of 11.75% over 72 months, with and without a balloon: