The balloon payment shock

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.

25 CommentsLeave a comment

  • 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 //

  • 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

  • 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

  • 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.

  • 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

  • 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 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.

  • 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.


  • 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

  • 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.

  • 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

  • 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

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