According to a report compiled by TransUnion, the average car loan amount South Africans are taking out is at a value of R391 000, reflecting that consumers are opting for bigger car loans.
This happened despite an 8.4% decrease in new passenger vehicle sales as well as a 10.6% decrease in total vehicles financed.
High interest rates forcing consumers to resort to balloon payments
When it comes to car loans, in the last five years, Standard Bank has reported a significant increase in the amount of consumers taking on a balloon payment for their vehicle financing. The bank reported as many as one third of their clients are taking on the maximum balloon payment.
How does a balloon payment work?
When it comes to regular financing for a car loan, you'll have one instalment at a particular interest rate that you will have to pay for the duration of your loan (loan term). However, when you have a balloon payment, you'll pay your instalments for a percentage of the loan, and after which, you will have to pay the balloon payment (a different amount & instalment) over the remaining period.
Advantages of taking out a balloon payment
One obvious advantage for taking out a balloon payment is that as a buyer, you will be able to have access to a car that you ordinarily wouldn't have been able to have access to.
A balloon payment allows you to initially make smaller monthly instalments. This can happen because the bank or credit lender freezes a percentage of the total cost of the car that you will have to pay at the end of your your loan. This amount is known as the balloon payment or residual amount.
Disadvantages of taking out a balloon payment
Realistically, if you're having to pay a smaller monthly instalment and still have a big lump sum to pay at the end, you can't really afford the car.
When you buy a car with a balloon payment, you aren't really owning the car because even after you've 'paid' for it, you'll still have to pay the balloon payment at the end. This will either mean settling the lump sum or taking out a further loan for an extended period.
This will also make it more difficult to change your car more frequently because you will still have money to pay for it after. It's also important to remember that even if you sold your car at the end to cover the lump sum, it would've depreciated in value significantly, and you may still have an outstanding amount to pay. Or, you'll just be left without a car and need to take out another loan for a new car.
Is a balloon payment included in car finance?
Think of a balloon payment like paying a deposit for your car, but instead of paying it upfront to the car dealership, you pay it at the end of your loan to the bank.
Banks and credit lenders may offer you the options of settling your balloon payment as a lump sum or refinancing your balloon payment so that you pay it off over a new loan term. This may mean incurring further interest on that amount.
Can I take out a loan against my car?
Some companies do offer the service of taking a loan out and using your car as collateral. This is known as a secured loan where you use an asset (your car) as collateral.
Are you struggling to keep up with your car repayments?
Are you in South Africa and currently struggling to keep up with your car repayments even with a balloon payment? We can help you. At Meerkat, if you are struggling to afford or pay for your current monthly debt obligations we can help you by consolidating all your debt and potentially reducing your monthly debt instalment. We do this with debt counselling. And other than potentially saving on your monthly debt instalment, you ensure that your car is protected from legal repossession.
You can save up to 50% on your monthly debt instalment with debt counselling at Meerkat! See if you qualify below
Want to know more about debt counselling? Read this blog post.
Did you know: we've saved many of our clients up to 50% on their monthly debt instalments?
Who is Meerkat?
MyMeerkat FSP is an authorised financial services provider (FSP 50979). Registered Debt Counsellor NCRDC 2613. We've been voted as one of the Top 10 Large Debt Counsellors in South Africa.
Let's chat about how this process works and how we can help you!
