Balloon payments lower your monthly car instalments but leave a lump sum at the end. Here's how they work and when they make sense.
If you’re exploring car finance options, you’ve probably come across the term “balloon payment.” It helps lower your monthly instalments, making it easier to afford your car, but it also means you’ll have a larger amount to pay at the end of your finance term. Let’s break it down so you can decide if it’s the right choice for you.
What is a balloon payment?
A balloon payment is a lump sum you agree to pay at the end of your financing term. Instead of paying off the full loan amount over your loan term, a portion of it (usually between 20% and 35% of the car’s price) is set aside to be paid at the end. This lowers your monthly instalments but leaves you with a large amount due when your loan term ends.
How popular are balloon payments in South Africa?
Balloon payments have become a common choice among South African car buyers. According to Standard Bank, about one-third of their customers opt for the maximum balloon payment option when financing a car. Additionally, the use of balloon payments in new vehicle purchases has increased by 41% over the past five years. This trend suggests that many people are using balloon payments to make car ownership more affordable amid rising living costs and high interest rates.
How does it work?
Let’s say you’re buying a car for R300,000. You take out finance with a 20% balloon payment, which means you’ll owe R60,000 at the end of the loan term.
Your monthly instalments are then based on a loan of R240,000 (R300,000 minus the R60,000 balloon). This brings your monthly repayment down by about R700 on a 60-month loan, which sounds pretty decent.
But here’s the thing, you’ll still have to pay that R60,000 at the end. So while a balloon payment makes your monthly costs easier to manage, you need a solid plan for that final chunk of cash when the time comes.
The pros of a balloon payment
- Lower monthly instalments – Great if you need more breathing room in your budget.
- You can afford a nicer car – You could probably afford a fancier car than you would with a regular loan.
- Easier upgrades – If you like upgrading your car every few years, a balloon payment can work well if you plan to trade it in before the final payment is due.
The cons of a balloon payment
- You’ll pay more interest – Interest is calculated on the full loan amount, even though you’re deferring a chunk of it.
- Big payment at the end – You need a plan to settle the balloon when your loan term is up.
- Your car might be worth less than what you owe – Cars depreciate, and if yours is worth less than the balloon amount, you’ll need to cover the shortfall.
- It can be tempting to overspend – Lower monthly repayments might make it easier to justify spending more than you can actually afford.
What are your options when the balloon payment is due?
If you go for a balloon payment, make sure you know how you’ll handle it when the time comes:
- Pay it off in cash – If you’ve saved up, you can settle it in one go.
- Refinance the balloon amount – This means taking out a new loan to cover the final amount, so you’ll keep making repayments.
- Sell or trade in your car – You can use the sale value of your car to pay the balloon amount, but be mindful of depreciation.
- Extend the loan term – Some lenders might allow you to stretch out your repayments, though this could mean even more interest costs.
When would a balloon payment make sense for you?
- You have a plan for the final payment – If you know you’ll have the funds, whether through savings, a bonus, or another source, when the balloon payment is due, this option can make financial sense.
- You expect your income to grow – If you're early in your career and confident that your earnings will increase, you might be more comfortable handling the lump sum later on.
- You're using the car for business – If you're financing the car through a business and can claim tax deductions on depreciation, interest, fuel, maintenance, and even the balloon payment, this option can help with cash flow while maximising tax benefits.
Before you decide, run the numbers, think about what you’ll do when the payment is due, and make sure it fits your long-term budget. If in doubt, chat to a financial advisor to weigh up your options.
Balloon payments can be a useful tool in car financing, but they require careful consideration. The lower monthly repayments might seem appealing, but the final lump sum can be a shock if you’re not prepared. Always check the total cost of the loan, including interest, and be honest about whether you’ll be able to afford the balloon payment when it’s due. If you plan ahead, a balloon payment could work for you, but if you’re unsure, a standard car loan might be the safer bet.
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