How to calculate a balloon payment on your new car in South Africa

Often, the excitement of buying a new car comes crashing down when the reality of high costs, loan repayments, and other expenses comes into play, leading buyers to opt for loan structures with balloon payments.

By making use of balloon payments, more South Africans can afford to purchase a new car that fits into their monthly budget, instead of having higher monthly costs or one massive cash purchase.

This structure is similar to a deposit, but instead of a lump sum paid in advance to lower the price of the vehicle, a balloon payment forms part of the loan structure and needs to be paid as part of the final settlement.

The value of the balloon payment also depends on affordability and the borrower’s credit score, and while most banks limit buyers to lower percentages, some financing houses may offer balloon payments up to 50%.

Higher balloon payments are only really considered in low-risk scenarios, including on cars with higher resale value or low-risk clients.

This structure puts the buyer in a position where they need to save considerably every month towards a much higher final figure, which needs to be settled in a single payment to complete the purchase.

According Lebo Gaoaketse, Head of Marketing and Communication at WesBank, the average balloon size per deal is 37%.

He also explained that there has been an increased uptake in deals involving balloon payments, and despite this, they are still often misunderstood.

“There’s a common perception that balloon payments should be avoided at all costs, but they are designed to make monthly vehicle repayments more affordable,” he said.

“This allows customers to purchase a car when they need one.”

Gaoaketse urged customers to understand the full terms of the agreement and stressed that it is crucial to read their financing contracts carefully to be aware of repayment terms.

“It’s crucial to remember that at the end of the finance term, the outstanding balloon amount must be settled before you can take full ownership of the vehicle,” he advised.

Calculating the costs

The biggest benefit of a loan with a balloon payment is a lower monthly repayment, and while that is a good deal, there are pitfalls to be wary of, the first of which is calculating affordability.

If you are planning to buy a car for R400,000 with a balloon payment of 20%, your monthly instalments will be paying off a capital balance of R320,000.

The balloon payment of R80,000 is then due at the end of the loan term, which is often either 60 or 72 months, which means the borrower needs to save up R80,000 in five or six years.

According to Nedbank, the interest portion of the monthly repayment is still calculated on the actual price of the car, which in this case would be R400,000.

“Even taking this into account, though, a balloon-payment option should make monthly loan payments more affordable,” the bank explained.

The downside of a balloon payment is taking on extra debt to buy an asset that is depreciating, and the value of the vehicle may end up less than the amount still owed.

At the end of the loan term, whether it be five or six years, and it comes down to settling the balloon, borrowers do have several options to do so.

The first option involves paying the balloon in one payment, allowing the borrower to take ownership of their vehicle.

The second option is to settle the outstanding balance by taking out a new loan, which then becomes a new loan agreement.

The final option for settling the balloon is to extend the term of the existing loan, meaning that borrowers can choose to extend payments with a revised payment schedule instead of applying for a new loan.