Is a balloon payment right for me?

Are you a good candidate for a vehicle-finance deal that includes a final large – and potentially eye-popping – sum of money due at its conclusion, or should you rather avoid it? Read on before you jump into it.

You've heard the term balloon payment before, but what is it? And who is it for exactly? "A balloon payment is a convenient solution that is designed to assist a buyer with their cash flow at the start of a [financing] agreement. This is done by setting aside a portion of the purchase price so the buyer's monthly repayments become lower," says Lebogang Gaoaketse, head of marketing and communication at Wesbank Motor.

"Just remember that this deferred amount will still be owed to the bank at the end of the contract term," he cautions. "So customers opting for this arrangement must be disciplined enough to save sufficient cash each month so that they can settle this debt once it is due."

How a balloon payment affects your car payments

Using an example, if a vehicle's purchase price is R300,000 and the buyer defers 10% of this into a balloon payment, their monthly repayment will only be calculated on R270,000, says Gaoaketse. The deferred R30,000 must then be settled at the contract's conclusion. "While a balloon payment is similar to putting a 10% deposit down on a vehicle, the difference is that the buyer needs to save the R30,000, while also paying off the loan so they are able to reimburse the bank when the finance term concludes," he says.

You may be tempted to take advantage of this sort of deal if you are in need of a safer, bigger or fancier vehicle – for commuting or a growing family, or to keep up with the Khumalos.

But be sure to research what a balloon payment may entail before you take the plunge, suggests Gaoaketse. He adds that although a looming lump sum is easy to ignore and forget about after years of driving a vehicle, settling it remains your responsibility.

Avoid a balloon payment if...

So how do you know if you are the appropriate candidate for a balloon payment? This sort of deal requires discipline and a clear understanding of monthly budgeting. If you're unlikely to manage your cash flow well and/or save during the finance term, steer clear of this type of finance plan.

While the benefits that come with keeping monthly costs down may be extremely appetising, it is important not to view such a deal as a way to purchase a car you simply cannot afford. Think of a balloon payment as taking a deal that you can afford, and breaking it down into even smaller chunks, so that you're paying less on a monthly basis, which will free up more of your salary for your other needs.

When to know a balloon payment is right for you

On the other hand, a balloon payment has some great advantages – if properly used. "Depending on the percentage of the balloon amount, the money saved on monthly payments should more than cover the costs of interest for a loan in order to refinance the lump sum of debt at the end of the term," suggests Gaoaketse.

Remember, no interest is added onto the withheld amount, or balloon payment, that you take out. So a balloon payment won't mean you're paying even more on your loan in the end.

Gaoaketse says that a healthy deposit will be of benefit to you further down the financial road as it will bring your breakeven point forward, and lower the monthly repayment costs and the deferred debt (if any).

Still not sure if a balloon payment is the right option for you? Be sure to run any concerns past the qualified finance and insurance (F&I) manager at a reputable car dealership to advise you. Essentially, you need to be honest with yourself about your own personal financial acumen, in so far as it touches on both cash-flow management and discipline to save, concludes Gaoaketse.

When calculating your car expenses, and whether or not a balloon payment makes sense for you, be sure to factor in your Car Insurance too. Our Car Insurance comparison tool means you can compare and find the right deal for your pocket in just minutes.

This article is for informational purposes only and does not constitute financial, legal, medical or insurance advice. Hippo is a comparison site helping you evaluate quotes from trusted South African insurers. Always review policy details before making changes. Quotes are risk profile dependent and subject to annual review. No fees are charged for using Hippo’s comparison service. HAS (Pty) Ltd and HCS (Pty) Ltd are authorised FSPs. Terms and conditions apply.