Urgent Warning Issued for Car Buyers
Many South Africans are increasingly turning to balloon payments to cope with the soaring costs of new vehicles but experts warn that this short-term solution could come at a heavy long-term price.
Ernest North, co-founder of Naked Insurance, has raised concerns about the growing reliance on balloon payment finance plans, stressing that while they may ease the burden of monthly instalments, they often lead to financial strain later.
Why Balloon Payments Are Becoming Popular
Households grappling with the rising cost of living are seeking ways to reduce their monthly spending. This has led to a rise in car loans with balloon payments, which allow buyers to postpone paying a portion of the car’s value until the end of the finance term.
Data from Lightstone Auto shows that the average car loan now stretches to 72 months (six years). While spreading out repayments lowers monthly instalments, it significantly increases the total interest paid. Balloon payments go a step further by reducing instalments upfront but they leave buyers with a hefty lump sum to pay later.
Typically, balloon payments cover between 20% and 35% of the car’s value, though banks rarely approve anything higher than 40%. For cash-strapped households, the appeal lies in paying less per month, without always considering the long-term consequences.
“Balloon payments are attractive because they make cars seem more affordable in the short term,” said North. “But many consumers don’t realise they may end up in a debt trap four or five years later when the balloon comes due.”
The Risks of Balloon Payments
The major pitfall is that the outstanding balloon amount must still be paid at the end of the loan period. Many buyers fail to budget for this, leaving them unable to cover the final cost despite years of consistent repayments.
“Lowering your monthly instalments may feel like a relief and even allow you to drive a more expensive car,” North explained. “But the sting comes at the end of the contract, when the lump sum is due. Too often, people struggle to meet that final repayment.”
Example of Balloon Payment Costs
Naked Insurance provided the following breakdown for a R500,000 vehicle financed over six years at an interest rate of 10.50%:
| Balloon Option | Monthly Payment | Lump Sum at End | Total Cost of Credit |
|---|---|---|---|
| No Balloon | R9,481 | R0 | R682,000 |
| 20% Balloon | R8,478 | R100,000 | R710,000 |
| 40% Balloon | R7,475 | R200,000 | R738,000 |
As shown, while monthly payments drop significantly, the total cost of credit rises. Buyers also face the challenge of finding a large lump sum at the end of the term.
Options When the Balloon Payment Is Due
When the balloon amount becomes payable, motorists have limited choices:
- Pay it in cash and own the vehicle outright.
- Refinance the balloon, entering into a new loan with fresh interest charges.
- Extend the loan term, if the bank allows, which adds more interest over time.
- Sell or trade in the car, which may leave the buyer without an asset after years of payments.
Balloon payments can be useful under specific financial plans, but for many South Africans, they create more problems than they solve. Motorists are urged to carefully weigh the long-term costs before committing to a deal that could turn into a financial trap.
Related article: What to Know Before Buying a Car Privately
