A balloon payment is a financial plan where a portion of the purchase price of the vehicle is set aside to lower the buyer’s monthly repayments.  This deferred amount must be settled at the end of the contract term.  The buyer must be disciplined to save the needed money each month to settle this debt when it is due.

How does a Balloon Payment Work?

When you purchase a vehicle for R200 000 and you defer 10% of it into a balloon payment, the monthly repayment will only be calculated on R180 000.  The R20 000 must be settled at the end of the contract term.  A balloon payment is like putting down a 10% deposit on a vehicle.  The difference is that you need to save the R20 000 while paying off the car loan.

A balloon payment may seem tempting when purchasing a car, but buyers must be aware as it is easy to forget about the balloon payment after years of driving.  This debt must be settled at the end of the contract term.

When to Avoid a Balloon Payment

The benefit of a balloon payment may seem tempting, but it requires discipline and monthly budgeting to enjoy the benefit.  Paying less every month may seem enticing, but you still must be able to save money every month to save for the balloon payment.  If you are unable to manage your money and save during the finance term, it is better to steer clear of a balloon payment.

When to Consider a Balloon Payment

If effectively use, a balloon payment has some advantages.   No interest is added onto the balloon payment.  The lower monthly repayments should allow you to save some money during the financial term.  A decent deposit will be beneficial as it will lower your monthly repayments and balloon payment.

Be honest with yourself when it comes to your financial management and discipline to save.  Ensure that you include car insurance when calculating your car expenses.  If you can keep to your budget and save for the balloon payment, this finance plan can work for you.

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