CRA Personal Finance – South Africa

Owning a vehicle is life-changing. You can go wherever you want and whenever you want, without being dependent on someone else. However, as with any other purchases, there will come a time where you are interested in looking for a different car.

Whether it’s because you can afford a better vehicle, require a bigger or safer car or even if you just want to try something new. 

What stops most people from upgrading their vehicles is the cost. We all know that vehicles, brand new or second-hand, don’t come cheap. Taking this journey will require that you make some sacrifices. Although balloon payments have been around for years, it has been deemed as the one “bad” financial decision that you shouldn’t take. However, a balloon payment can make financial sense when used correctly. Here are things you need to know about a balloon payment:

  • A balloon payment is an agreement you make with a lender, where a large amount of the cost of your vehicle is paid at the end of your loan term. 
  • You do pay interest on a balloon payment as well as interest on your loan agreement. 
  • When paying your balloon amount, you can either refinance the balloon, settle it cash or trade-in your car. 
  • Having a balloon payment doesn’t mean you can buy any vehicle. It’s always important to remember to stay within your means. It’s often recommended that you focus on buying a used car to cut the costs.
  • Just like when applying for vehicle financing, you will need to get car insurance as part of your agreement. So, you’ll need a car service insurance in South Africa to ensure you get pre-selected. 

Now that you understand what a balloon payment is, here are five times a balloon payment is justifiable. 

Fits into your budget 

For starters, the main concern people face when car shopping is finding a pair of wheels that fit into their budget. It’s a time-consuming process that can also be disheartening if the numbers don’t add up. Having a balloon loan, in this case, can make buying a car in South Africa more attainable. Your balloon payment will ensure that you can afford your monthly instalment for your vehicle, additional car expenses and be able to sustain your lifestyle. With a percentage of the overall cost paused, you can afford to get the vehicle of your dreams while ensuring that you aren’t left strapped for cash every month. 

You’ll trade-in your vehicle at a later stage

If you’re someone who prefers to switch things up every once in a while and don’t see yourself driving the same vehicle forever, then a balloon payment is for you. Since you will be trading in your vehicle, you can trade it in at the end of your term. By doing that, you’ll be allowing yourself room to cover the residual from the balloon payment, and then purchase a new car that you like. 

If this is what you plan to do, a helpful tip is to go for a balloon payment that is a similar size to the cost of your current car’s value. By doing this, you will be able to have a smaller balloon payment to cover when the time comes. Another tip is to trade in your vehicle when it’s reached its breakeven. A breakeven is when the trade value for the car is more or less in line with the settlement amount that you owe. This will leave you with a positive cash balance that can be helpful in your new purchase. 

You have a plan on how you’ll settle costs in the future

When you take out a balloon payment, it means that you will have to pay back a certain amount at the end of your term. This is what scares most people as they don’t know where they will get the money to settle. But, if you know that there is a large sum of money that you will be getting at a later stage, or know that you would have saved up some money to be able to pay off the balloon, then this can work for you. 

You have multiple streams of income 

A balloon payment is ideal for certain income structures. Multiple streams of income don’t come through at the same time, nor will it be the same amount. Therefore, you cannot go into a loan agreement thinking you will pay with money from side hustles. What you can do is use that income to make an additional payment to your balloon amount. That way, you’re hitting two birds with one stone. Your main income will cover the vehicle finance amount, and your extra income can cover your balloon amount. If you cannot pay your balloon payment while paying the vehicle loan, you can open up a savings account and save that money until your loan period ends. Then, you’ll have enough money to settle your balance. If you plan on saving on the side, you can use an online budget tool to help you calculate how much you need to save, including the interest on a balloon payment. 

You’re willing to refinance it 

If you know that you will change your vehicle or upgrade in a few years (and have no issue with refinancing), then a balloon payment is no hassle for you. When you refinance, you will apply for a new loan to pay off the vehicle loan. This will only work to your advantage if you:

  • Keep your credit score in good standing. This increases your chances of being pre-selected for financing with a lower interest rate. It ensures that you don’t spend too much money on interest the second time around. 
  • You opt for a small balloon loan so that you can have a short loan agreement. 

Note: refinancing won’t work if you were inconsistent in your current loan agreement, as you won’t be seen as a trustworthy borrower. And, it’s not a good idea to get refinancing if you cannot get a better interest rate. 

Balloon payments have been villainised because people did not know how to use them correctly. When considering a balloon payment, always ask the whys and the hows to ensure that you know exactly what you are getting yourself into for the long run. When you understand everything, you’re able to make more informed decisions. So, make sure you do additional research, contact lenders and hear what their conditions are. You can also use a balloon payment calculator to get an idea of how much you will need before you purchase your car. Happy vehicle shopping!

Article Credit To Low Velder.