- Standard Bank has said that new vehicle purchases that include a balloon payment have increased by 41 percent over the last five years.
- This is indicative of the high cost of living and the price of new vehicle ownership.
- Balloon payments can help to bring monthly repayments down but with the downside of there being a large bill due at the end of the financing period.
Owing to a lack of reliable, ubiquitous and safe public transport, owning a car is something of a necessity in South Africa. In an ailing economy however, buying a new car is a costly endeavour
To make ends meet, many South Africans opt to include a balloon payment in their financing agreements with vehicle dealers. A balloon payment means that rather than including the full cost of the vehicle in the payment period, a percentage is excluded and is instead due at the end of the financing period.
Because of this, many South Africans opt to trade their car in at the end of the period and take up a new agreement for a new vehicle. Here, the buyer can also choose to spread that balloon payment across the finance of a new vehicle.
This practice is becoming a trend according to Standard Bank which notes that the number of new vehicle purchases that include a balloon payment has increased by 41 percent in the last five years.
“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. High fuel costs have added to consumer strain by pushing up vehicle ownership costs significantly in the past three years,” says the Head of Standard Bank VAF Enablement, Glenn Stead.
If a customer wants to spread the balloon payment on a vehicle, this requires an application and if the deadline is missed it can lead to the sale of the car being hampered. In addition, because the balloon payment isn’t generally touched when paying off the vehicle, buyers can be shocked by the balloon payment.
“If you don’t want higher interest to accumulate on your balloon portion, you can make additional ad-hoc payments and ask your lender to allocate those towards the balloon,” explains Stead.
Fortunately, the highest a balloon payment can go at most lenders is up to 40 percent of the vehicle’s value but it’s a rarity to get that.
“In Standard Bank’s VAF’s case, the only time we can approve a balloon payment over 40% is when the initial financing period is short – 24 months or lower. We also look at the customer’s affordability score and the car being financed. Where the car depreciates far slower than the typical vehicle that we finance, we may approve a balloon payment over 40%,” says Stead.
South Africans should be mindful of the cost of this balloon payment when purchasing a car as it, and the accumulating interest could sneak up on them at the end of a long repayment period.
While Standard Bank’s figures are reflective of its customers alone, we suspect that other lenders would note a similar trend, especially given the state of the economy and the cost of everything.
