Balloon-payment car deals on the up
Know what you're getting into when financing a car
"A balloon payment is a mechanism to try and make a car that is outside of your reach fit into your monthly budget - we recommend that clients actually not opt for balloon payments and rather buy more affordable cars."
That was vehicle finance market leader WesBank's advice in March 2015, when 18% of its total deals signed every month - for new and used cars - included balloon payments, typically 28% of the sale price.
That percentage has almost doubled since then - now 33% of all finance contacts signed with WesBank have a balloon payment of about 30%.
In other words, to get the monthly repayment down to a figure the buyer can afford, 30% of the price of the car is carved out of the deal and lumped on to the last month - usually month 72 - as a massive final payment, which must either be settled in full or refinanced at the end of the term.
Car prices driving trend
Almost half - 49% - of all WesBank's new-car deals now have balloon payments, versus 30.6% of new-car deals in March 2015. The percentage is lower for used-car purchases - 22% of WesBank's used-car transactions have balloon payments.
Clearly, WesBank is no longer actively discouraging balloon deals.
"The reality is that car prices have increased between 30% and 40% in the past two-and-a-half years, along with the total mobility cost basket: the price of petrol and insurance has also soared," says Rudolf Mahoney, WesBank's head of brand and communications.
"And consumers' incomes have not nearly kept pace, so we've had to become flexible with our finance structures to help people get into new cars."
A lot can happen to a person's financial status in six years.
They could no longer be eligible for a new loan, due to an impaired credit record, or the new finance deal comes with a much higher interest rate.
• R310,000 is the average transaction value for financed new cars
• 70 months is the average finance term for new and used cars
- Source: WesBank
"We find that very few customers actually keep their cars for the full 72 months," Mahoney says. "The average replacement cycle is 44 months - that's when the average motorist wants a new car."
With break-even point being only at around month 54 or 55 - the point where you no longer owe the bank more than the car is worth - that creates challenges for the dealership, Mahoney says.
"The consumer who decides they want a new car in month 44 needs to pay the remaining instalments and the dealer is under pressure to come up with some kind of trade-in assistance to get the deal," Mahoney says.
It's like a long-term rental
Another factor driving the balloon deal figures is the increasing popularity of the "guaranteed future value" deal - also known as a guaranteed buy-back - offered by almost all manufacturers.
These are usually structured over 36 months with 60% residual value - essentially the car's resale value is set at what it's expected to be at the end of year three.
But there are major limitations - it's not for those who do high mileage, as the mileage is limited to, for example, 10,000km or 15,000km a year, and the car must be kept in spotless condition. "It's a lot like a long-term rental," Mahoney says.
At the end of the 36 months, the consumer has the option of giving the car back to the dealer, trading it in for a new model or paying that very large balloon payment to own the car.
The upside is that instalments are low, and the car is covered by both a warranty and a service plan during those 36 months.
Other ways of financing
• Cash or your home loan
Paying cash for your vehicle is the cheapest way to buy one because you won't pay any interest and, if you are saving to buy one, interest will work for you rather than against you. If you don't have the full purchase price for a vehicle in cash, but you have made additional payments into your home loan or you can access money already paid into your home loan through an access bond, you could pay a lot less in interest if you pay for a vehicle out of your home loan. Repay what you borrow out of your home loan over a five-year term and not the remaining term of a typical 20-year home loan. If you finance a car over a long period, such as 10 or 15 years, you will land up paying many times the value of the car and the car will be worth very little for much of the time you are still paying off a large amount.
• Instalment with no balloon payment
You can pay off the car in monthly instalments for up to six years (72 months) either with or without a deposit. The longer the term, the more interest you pay. Ideally, you should put down a big deposit and structure the loan over the shortest possible time - that way you pay the least interest. Ask your finance agent to show you the quotations from all of the banks to make sure you're getting the lowest interest rate.
Rudolph Mahoney, WesBank's head of brand and communications, advises car buyers to opt for a linked rather than fixed interest rate, "as the Reserve Bank is likely to cut interest rates further".
• Instalment takeovers
An instalment takeover is often regarded as a way for someone with a bad credit score to pay off a car. It can work within a close family set-up, but it is illegal. If someone takes over your instalments and reneges on the payments, you, as the person who signed the finance contract, will still be contractually bound to pay the bank. It's also risky for you if you want to take over a contract, because the "seller" could decide they want their car back, resulting in a messy dispute.