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33% of South African car buyers are playing a dangerous game

Standard Bank has experienced a big uptick in the last five years of consumers opting to finance their cars with sizeable balloon payments as the rising cost of living continues to put pressure on household purses.

Overall, new-vehicle purchases including a balloon payment have increased by 41% in the past five years, the bank’s data shows.

In the last 12 months alone, approximately 33% of Standard Bank customers opted to include the maximum balloon payment on their finance contract.

“Given the current cost of living crisis, and the 15-year high interest rates in South Africa, consumers are looking for more ways to stretch their budgets,” said Head of Standard Bank VAF Enablement, Glenn Stead.

“High fuel costs have added to consumer strain by pushing up vehicle ownership costs significantly in the past three years.”

How a balloon payment works

Balloon payments can bring down monthly car finance repayments by a considerable amount, making them appealing options for cash-strapped South Africans who need a car to perform their daily responsibilities.

A balloon payment works like a deferred debt that consumers can opt to move to the end of their contract, and the monthly instalments are therefore calculated based on the principal debt minus the deferred debt.

Balloon payments are expressed as a percentage of the vehicle’s total purchase price, excluding additional warranty or service plan costs. Most banks allow up to a maximum of 40%.

However, Standard Bank has observed that not all buyers understand how this type of deal will impact their finances in the future, said Stead.

At the beginning of their contract, consumers know how much they will have to pay to settle the balloon payment on their last instalment, and when the time comes, they can choose to pay off the balloon in cash or enter into a new agreement to re-spread the payment.

Because re-spreading qualifies as a new finance contract, however, these individuals can spend another year, two, or three on paying off the balloon amount after settling their principal debt, depending on the structure of the agreement.

They can only take ownership of the vehicle and get the registration documents once the full balloon is settled, effectively turning what was supposed to be a five-year obligation into a more expensive eight-year relationship.

To avoid a nasty surprise at the end of their finance contract, consumers can make additional, non-contractual payments towards their balloon payment, but they must explicitly request that these payments be used to offset the balloon amount.

Otherwise, the additional amounts would be directed toward the principal debt and have no impact on the balloon payment.

Another option chosen by over 96% of Standard Bank VAF customers who had such a deal is to trade in their vehicles before the balloon matures.

“When this happens, the balloon is settled as part of the trade-in process, thus only 3.5% of our customers have had balloon that required settling or re-spreading,” said Glenn.

Why you should think twice before getting a balloon

Buying a vehicle with a balloon payment will see you end up paying more for it than you would have if you financed the entire purchase price from the get-go.

Standard Bank compiled the below table to illustrate the difference it will make if you purchase a R200,000 vehicle at a 10% interest rate, with and without a 20% balloon:

Expense Without 20% balloon With 20% balloon
Finance amount R200,000 R200,000
Period 72 months 72 months
Interest rate 10% 10%
Balloon n/a R40,000
Monthly repayment R3,705.17 R3,294.47
Total collectable R266,772.24 R277,417.65

The higher total expenditure is because while the consumer pays interest on the principal debt, there are no payments made towards the balloon amount during the contract duration. However, interest is charged from day one on the balloon amount, too.

“That’s why you need to think ahead when choosing to take a balloon payment,” concludes Standard Bank’s Stead.

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