Car balloon payments: Pop goes your budget!
A car balloon payment may not be quite as festive as it sounds! Consumers often don’t consider the down-the-road impact of a balloon payment and opt for a lower car instalment now with the worry of the balloon payment left for the future. In this article, we look at the balloon payment structure and what consumers can do to manage this or alternatives that can be considered when procuring a vehicle.
A balloon payment refers to the final payment that is due and payable at the end of a loan term. This can often be a relatively large amount, particularly where the monthly payments are initially low to encourage the purchase of a vehicle that may otherwise be out of reach.
It is crucial to be mindful of the final payment in any balloon repayment, as well as the terms you’ve agreed to with the car dealer or when financing a house. If the intent is to retain the vehicle after the balloon repayment, then it's not sufficient to just budget for your monthly repayments, you would also need to put money away to cover the balloon repayment. One option is to put money into an interest-bearing account that can grow over time as you prepare for the final payment.
The other popular approach is to plan to sell the vehicle, usually back to the initial seller as a trade-in, with a new vehicle to be purchased generally again with a balloon payment financing model. This can work well, bearing in mind that if the trade-in value of the car is lower than the balloon repayment, then any shortfall will need to be covered by the consumer. And of course, at some point, the balloon payment can catch up to you if you cannot afford a new car again with another round of monthly instalments. Either you will have to trade in and forego a car or settle the balloon payment and keep the car.
What is the legal position if you cannot afford the balloon payment?
In the recent matter of Bokleni v First Rand Bank Limited t/a Wesbank (1798/2020) [2024] ZAECMKHC 146 (17 December 2024), a default judgment was awarded to Wesbank when Mr Bokleni failed to pay his outstanding balloon payment on his car and Wesbank had his vehicle repossessed.
Mr Bokleni alleged that he was unaware of the balloon payment. The court however found that Mr Bokleni was fully aware of the terms of the agreement, including the terms relating to the balloon payment and as such there was a clear breach of the terms and conditions by Mr Bokleni.
This reconfirms the importance of reading and understanding any agreement before signing, as you are bound upon signature - caveat subscriptor - let the signatory beware! Failure to pay a balloon payment can lead to severe consequences, such as vehicle repossession as well as a negative impact on your credit record.
Are there alternatives to purchasing a car with a balloon payment?
Of course, there are. The most obvious one is to trade in your current car and pay the difference in cash. For most consumers, that is not viable. Vehicle finance can then be procured for the difference or full value of the vehicle, but without a balloon payment. This will necessarily increase the monthly instalments and may make the vehicle unaffordable, but if you can afford it, at least you know that you need only cover the instalments and not also a balloon payment.
Another option that is growing in popularity is vehicle leasing. This allows a consumer to lease a car for a monthly amount, which usually includes insurance and maintenance costs, and drive the car for the duration of the lease. At the end of the lease, the car is returned to the dealer, and the consumer can consider leasing another vehicle. Unlike an outright purchase, there is no transfer of ownership at the end of the lease; however, there is also less paperwork compared to a trade-in, ownership transfer, refinancing. For some, it’s a simpler option if ownership isn’t important; for others, it’s a dealbreaker.
South Africans love their cars, and there is an option available for each consumer. Irrespective of how you procure your car, it remains imperative that you always make sure you understand the contractual terms and plan for important items like balloon payments etc.
Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).
Source: Seymore Du Toit & Basson
