Balloon Payments – don’t get carried away

Deciding on which car to upgrade to next or just buying a car for the very first time can be a milestone worthy of a celebration. However, your excitement can be short lived if you aren’t aware of the factors that come with purchasing a car – one such contributing factor being finances.

It is very important to think about affordability when buying a car, which includes your monthly repayments and running costs. Dealerships and finance houses have taken into consideration the depth of consumer pockets and have constructed a number of financing plans, one of which is balloon payments. A balloon payment is a larger payment sum which is added to the initial finance amount that enables you to pay lower monthly premiums for an agreed period of time before having to settle the final payment.

There are two types of balloon payments that you may find yourself considering:

  • Ownership residual– this applies when you are buying a car and are responsible for the balloon payment at the end of your loan term; and
  • Non-ownership residual– this means that your finance house still owns the car at the end of the loan term and is responsible for settling the balloon payment, usually through resale. This is like a lease agreement

While you may have the pending stress of having to repay a lump sum very soon, it may come in handy to know that some finance houses allow you to convert your original balloon loan into a ‘traditional’ loan that will be easier to pay back.

This revised payment plan can be structured closer to the end of your loan term or on the date when your balloon payment is due. Should you not be able to repay the amount as you initially thought you would and you don’t want to refinance, you may be able to trade in the vehicle to settle the balloon payment.

As much as this type of agreement can come with more affordable monthly debit orders, it can also come with other associated risks, and it is very important that you understand the terms of your agreement. Should anything happen to your vehicle, your financer will still need to be covered – and thus the importance of being properly insured. Some insurers may offer you an option to cover your residual payment for a slightly higher monthly premium.

When signing on the dotted line, be sure you have clearly read and understood what you are signing and what you are getting yourself into with the agreement. The last thing you want is a nasty surprise when you think you’re done paying for your car.

As soon as you’ve sorted out your upgrade or new car deal, you should consider investing in comprehensive car insurance  cover to make life easier.

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