Why you should avoid balloon payments

Thabo Shole Mashao interviewed Personal Finance Expert, Maya Fischer-French.

Listen to their conversation in the audio clip below.

Balloon payments are reportedly becoming attractive for many as the cost of living soars.

According to a recent BusinessTech article, "South Africans are turning to balloon payments as many battle with affordability caused by high interest rates, but many are unaware of the potential pitfalls and may end up paying off their cars for longer than initially planned."

Fischer-French says that balloon payments basically 'allow you to buy a car that you actually can't afford'.

"A balloon payment, also known as a residual payment, is when the bank or the finance house takes a percentage of the purchase price as a deferred payment at the end of a loan agreement." 

- Maya Fischer-French, Personal Finance Expert

"For example, you're buying a car for R200,000 and they say don't worry, we will take 20% of that payment and you'll only have to pay us that at the end of the six years and that effectively reduces the monthly repayments. So instead of maybe paying R3700, a month, you may only be paying R3300 a month. So it makes it feel on a monthly basis R400 less expensive."

- Maya Fischer-French, Personal Finance Expert

"When people go into a car dealership, they fall in love with a car, it's more than they can afford but the dealer says don't worry we'll put in a balloon payment, we'll help you lower those monthly instalments and therefore make it affordable on your monthly budget and that's kind of the selling point should I say of balloon payments."

- Maya Fischer-French, Personal Finance Expert

She explains that many people don't know what they are getting into when it comes to balloon payments.

"You end up paying significantly more interest on a car agreement that has a balloon payment and that's what a lot of people are missing. They look at the monthly instalment and they think it's cheaper, they don't understand the true cost of interest and the fact that at the end of that period, they are going to have to come up with a lump sum to settle that balloon payment."

- Maya Fischer-French, Personal Finance Expert

"The concern I have with balloon payments is that people don't understand the true cost of them and that it's costing them more on interest, and secondly, they come to the end of the finance year period - very few people have a lump sum to suddenly pay off a car so they land up refinancing it and that costs more money or they trade the car in and get a new car but that balance is just transferring to a new car so they are getting deeper and deeper into debt."

- Maya Fischer-French, Personal Finance Expert

Fischer-French advises that if you want to buy a vehicle, you should save towards a deposit instead of going the balloon payment route.

Scroll up to listen to the full conversation.