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The balloon payment shock

Aug 26, 2019

The balloon payment shockOne of the more common questions we receive from readers about car finance is regarding a balloon payment. In many cases it seems that consumers eager to buy a car sign on for a financing agreement that they do not fully understand.

When we talk about balloon payments (also called residual payments), this refers to a portion of the selling price that is payable at the end of the agreement.

Listen to Maya and Mapalo Makhu discussing this topic on the My Money, My Lifestyle podcast.

Many car financing plans offer this option as it allows you to pay a lower monthly instalment. However, the full balance of that balloon payment must be paid whether it is at the end of the agreement or when you decide to settle your vehicle finance loan. Taking a balloon payment also increases the total cost of the car finance.

For example, you find a car that you really like for R500 000. However, the monthly instalment over five years is R11 400. You cannot afford this, so the dealer suggests that you take a 30% balloon payment option.

This means that R150 000 is put aside to be paid at the end of the agreement and your monthly instalment is calculated on the remaining R350 000

This drops your monthly repayment to R9 700. So now the car becomes “affordable”. What people do not realise is that at the end of the five-year period they still owe the bank R150 000 and that the total cost of the loan is higher.

If you don’t opt for a balloon payment, over five years you pay R684 000 for the car. With a balloon payment of R150 000, you pay R582 000 in monthly instalments plus the R150 000 at the end of the period – a total of R732 000, which is R48 000 more than the total without the balloon payment.

What happens when the balloon payment is due?

Most banks will notify you 90 days before the balloon amount is due to give you time to consider your options. You generally have three choices:

  • Pay the full balloon amount: This assumes that you have R150 000 available to settle the amount.
  • Refinance the balloon amount: This is a new agreement and means you must pay for an extra 12, 24, 36 or 48 months depending on the option you choose. The interest rate of this new agreement may also differ from your original agreement.
  • Sell or trade in the vehicle at a vehicle dealership and settle the outstanding amount:  If you decide to sell your car through a dealership, the dealer will first settle the outstanding amount which includes the balloon payment before paying the balance to you. If the amount is too little to cover the outstanding amount, you will have to settle it or refinance the amount. Even if you sell your vehicle privately you must settle the balloon payment. This option could however leave you stranded without a vehicle.

You could trade your vehicle in at a dealership and replace it with another vehicle. The trade-in value will then be used to cover the outstanding amount which includes the balloon payment. The dealership will pay the outstanding amount directly to the bank as part of the process. If the trade-in value does not cover your outstanding amount, you must either settle the outstanding amount or refinance it.

How can I pay off my balloon payment?

According to the Motor Finance Corporation, even though the balloon payment is used to reduce your monthly instalments, it remains part of your finance agreement. This means that when you request a settlement amount on your vehicle the balloon amount is included in the calculation of the settlement amount. Should you decide to settle your vehicle before the finance term is over, you will still have to pay the balloon amount as it formed part of your original agreement.

Some people think that because they have paid in extra each month to their car repayments this has gone towards settling the total debt. They come in for a surprise when they discover they still owe the full balloon payment. It is important to note that unless you inform the bank, the additional car repayments will not be allocated to your balloon payment and will only be used to reduce the debt with the monthly instalment.

The best way to lower your balloon payment is to inform the bank that the additional funds you are paying must be used to reduce the balloon amount. Alternatively, you could open a savings or investment account to start saving towards the settlement of the balloon payment at the end of the contract.

This article first appeared in City Press.


  1. thanks for so much eye opener Maya. Much appreciated

    • Just wish more people knew about this before buying a car!

      • Hi Maya, i just request for your advice and input. I also have a baloon payment of 54 000 on my vehicle which i bought in 2015 for 72 months. When I finished the instalment in 2021 I already paid advance of 6000 so far and still paying extra 200 monthly which reflects on statements. The residual instalments are for 19 months so I already paid 25 000 and I am left with 13 on that residual. Now i want to know will I still pay for 19 months of residual even if I have 6000 advance payment?

        • You need to ask the finance house to allocate the R6000 advance to the balloon payment and to then readjust the term of the loan.

  2. hi, so I have a balloon on my car as well, financed for 72 months, what happens if I pay it off in month 69, does the residual amount fall away and the car is fully owned my myself?

  3. Is it better to settle ballon amount or rather refinance the amount considering these try times.

    • It is always better to avoid taking on more debt, but if settling your balloon payment means you have no emergency funds left, then maybe look at a compromise where you pay off some of it and finance the rest over as short a time period as possible.

    • Hi Maya,

      I have started saving money for my balloon, but now I don’t know whether should I pay it to the finance house or keep it in savings and generate a bit of interest, will it make a difference if I pay it off now?

  4. I just realised now that I have a balloon on my car. I am supposed to finish it by April 2020. My challenge is that I am now blacklisted but my car I have been consistent with payment. I have not saved anything for the balloon as I was never aware. Does this mean that they will take my car

    • This could be a problem as you cannot refinance if you have a negative credit record. Have you discussed this with the bank?
      If you cannot find a solution then rather sell the car before it gets repossessed.

      • Hello Maya, I have R66 120 balloon payment due on 30 June this year. Advice me on the advanced payment reflecting on my monthly statements which only started in April 2020. I’m also paying R300 extra on my installment. How these two activities are going to impact on my balloon. Explain the recapitalization process?

  5. Hi Maya

    Please can you assist me.

    I am planning on buying a 2020 Nissan Navara for R440k – they are giving me this deal at almost R65k below current retail value.

    My finance application looks like this
    i= 10.2%
    t= 72
    d= R35k
    balloon = 40%

    I plan on selling the car in 3 years (estimating the retail in 3 years, based on current models to be around R370k)

    Is this an advisable option?

    • Keep in mind that when you come to sell the car you will owe the bank a lot of money as the 72 months repayment period means you have paid off very little capital by then. You also have the balloon payment of R176 000. If you have an accident during that time your resale value may be lower than you expect. You will more than likely be selling the car for less than you owe on it and have a shortfall. If you really want a car for only three years consider leasing

  6. Hi i don’t understand this balloon repayment I have buy n lots of cars but i never buy balloon car but now im stacking with one and is n secondhand car i don’t nou what to do i don’t wand the car anymore

    • You can sell the car but you would have to settle all outstanding amounts including the balloon payment. Alternatively you can arrange to pay towards the balloon payment if the finance house allows it – or just start saving money so you have it ready when the balloon payment becomes due

  7. I so regret taking out a vehicle now with a balloon payment! I had a 2010 model car and had R70 000 to settle. I then saw this amazing car which was out of my price range, i never understood the word residual (i know) and sent them to put in the tracker etc. only to find out the amazing instalment was taken with a R60 000 balloon payment! the car is a 2018 model with less than 15 000 km on the clock. I am having so much regret now.

    • That is so terrible! These residuals are so dangerous and trap us into thinking we can afford something we really can’t. try put money away each month so you can settle that residual when its due

  8. Hi Maya. Can I pay my Baloon payment before it becomes due at the end of the contract term, and be left to concentrate on the car debt?

    I’ve manged to save up the R60 000 for Baloon payment. My settlement amount is on R116 487.77.

    • You would need to specifically request the finance house to do that. some do and some don’t

  9. I have bought a used car on balloon payment and it has been a year since I bought the car and wishing to trade it in for a new car. Is this a good option

    • I can pretty much guaranteed you that you will have to sell your car for a lot less than you owe on it. Rather focus on paying off that balloon payment

  10. Hi Maya

    Thank you for info. Mine is due in July and I was shocked to learn the amount outstanding. Never ever balloon payment

    • Hi Maya , what happens to my installment when i pay off my baloon

      • If you pay your balloon before the principle debt, your installment would probably remain the same but you would pay off a bit earlier as there would be less interest

      • Hi Maya, is it a good thing to pay of your balloon payment before its due date arrives if you are intending to keep the car at and you continue paying the remaining debt of the car without residual?

        • Yes is the short answer. That balloon payment attracts interest

  11. Hi its Mojalefa in Alberton. Is possible for me to get a car finance with no deposit and avoid this 72 months, and opt for 60 months. In this case im taking car for R150k which is half of what a qualified for the last time checked.

    • you can buy a car without putting down and deposit and I would highly recommend you opt for 60 months rather than 72 months. It would be based on your affordability. I use Nedbank’s calculators – just put in 0 for the deposit and 0 for the balloon payment. it gives you a repayment of R3500. Use the calculator to play around

  12. Good day Maya.

    After having read this, i feel that balloon payments must be dealt away with.
    We rather create a society that is financially wiser than a society that is trapped in debt.

    If one can’t afford a car, give them an opportunity to go save money for what they want buy.


  13. Dear Maya
    it is time that banks assist in curbing over indebtbetedness. The example above is clearly unfair to consumer… why have an option that will put in debt for over 7 years at at high cost… this is repugnant to National Credit Act…the other issue house for the same amount a consumer is forced to take the loan over 20years at higher cost why not allow a consumer to take the loan over 5-6years…unfair… and actually unlawfully… creates overindebtedness

    • The NCA actually permitted 72 month repayments and balloon payments – before then you could only finance over 5 years. The idea was to make car purchases more affordable but as you can see, it did the opposite. To clarify you DO NOT have to take a 20 year home loan. It is the default but you can take a 5 year home loan as long as you can afford the monthly repayment. If you already have a 20 year home loan you can accelerate and pay off sooner – there is no limitation

  14. So true and interesting Maya, I’m also the culprit of rushing to sign up for vehicle contracts. Then what happened later was that, the sales person drive me to sign a contract without considering other financial implications and dump me with a huge amount of debt.

    They themselves (dealership) request settlement amount from their bank and draft a vehicle contract in my absence. I signed the contract with a hope that they have done its homework and gave me correct figures regarding the vehicle. The sales person phone me to come and sign the contract and explain to me that the car is going to be settled in full.
    Based on the information of the sales person and looking into the new affordable contract the agreement was reached and then signed.
    The dealership also offered me a cash back of R125 000 indicating that I qualify for trade assistance.

    Before the vehicle was purchased, I directly phone the bank and ask for the settlement amount of the vehicle. The bank issued the settlement amount through my email address before but I continuing to search for the dealership that can help me to trade in my car.

    Out of (8) eight dealerships that I was in contact with, one of them was responsive and promise to make a deal for me. Then I provide them with all necessary documents then they took over from me to structure a deal. Later the dealership confirmed that they can structure a new deal that is affordable and reasonable for me after taking consideration of all the documents submitted to them

    The dealership communicate directly with its bank regarding settlement amount of vehicle and a new deal. The contract was signed and sealed with the dealership.

    Later on, the bank claimed that the settlement amount offered in the contract was incorrect and I had to pay additional amount R5000 on monthly basis on top of the new initial agreement of R8600. To cut the story short, I tried to explain to the bank that I’ve signed the contract based on the offer that was before me with the trust that the bank satisfy themselves with the correct amounts before they issue a new contract based on the documents submitted to them hence I lied to myself.The bank took my to high court and I incurred irregular and fruitless expenditures amounting to R473000 which I currently paying separately to the bank without a car.

    I think personally you are doing a good job to advise people not to enter into a new vehicle contracts without taking other related aspects of what their getting in for.

    • That is a terrible story! We want to trust the people to give us the right deal, but the truth is that we have to do our homework properly..

  15. Hi, I have a balloon payment coming up in mid September. The outstanding balance is R73 285.

    I have saved an amount of R60 000 towards payment. What will you recommendation be in terms of handling this issue.
    Do I pay in the R60 000 or take an extended payment period to cover the balance?

    Kindly advice

    • If you take an extended payment period you will pay more interest, so it makes sense to pay in the R60 000 – it will save you money.

  16. My bank has not contacted me to refinance or pay my balloon payment yet. 5 years past already last December. What does this mean for me. Am I in danger financially

    • I think you need to call them – don’t ignore it. Was your car financed over 60 months? Are you still paying anything towards the car?


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Maya Fisher-French author of Money Questions Answered

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