What you need to know about balloon payments

“My car loan is nearing the end of its contract but there’s a balloon paymentof R40 000 left,” a reader writes. 

“I don’t have cash. Do I have to pay it as a lump sum, can I refinance, or is there another option?”

This reader’s situation isn’t unique. Balloon financing means a portion of the selling price – the balloon – is payable only at the end of the loan agreement. This reduces the monthly instalments but the balloon payment still lies in wait. The balloon can be as much as 20% or 35% of the selling price.

Unfortunately, many people forget about this major expense at the end of the loan agreement and when it rolls around, they’re in a tight spot.

We asked Ghana Msibi from WesBank to explain the options

Talk to your credit provider

Because many of us tend to forget about balloon payments, many credit providers will send you a notification 90 days before your contract is due to end, reminding you of the outstanding amount.

The credit provider will also discuss options with you, which are usually:

1 Pay cash if you have the money

2 Apply for refinancing

3 Sell or trade in the car – although this would be done through a car dealership and not through your credit provider.

REFINANCING YOUR LOAN

This means taking out a completely new loan to pay off your outstanding amount – in this case R40 000. The bank will therefore do a new credit check and you’ll have to apply formally for the money.

Many credit providers have application forms available online, so search “refinancing”on their website, download and fill in the relevant forms and send them off. Or go into a branch and apply there. Apart from the loan application form, you’llneed these documents: three months of salary slips and bank statements; proof of address; a driver’s licence; and your ID or passport.

Refinancing is usually granted in periods of 12, 24 or 36 months. The interest differs from one credit provider to another but has to be within the limits stipulated in the National Credit Act.

Car finance falls under the “other credit agreements” section of the act. The interest rate is calculated as follows: repo rate + 17% a year. This is the maximum legal interest rate, says Matthys Potgieter from debt consolidation company DebtSafe. Credit providers may charge a lower rate but not more.

SELLING OR TRADING IN

If you choose to sell your car through a dealership, the dealer will first settle outstanding payments (such as the balloon) before paying out the balance to you. If that amount is too little to cover the balloon, you can pay a portion of it and take out refinancing for the rest. But this will probably leave you without a car. You might consider selling privately but you’ll still have to settle the balloon payment from the proceeds of the sale.

The other option is trading in the car at a dealership and replacing it with another car. The car’s trade-in value can be used to cover the balloon. The dealership will pay the outstanding balloon amount directly to the credit provider as part of the trade-in process.

So if the dealership offers you R50 000 for your car, it will subtract the R40 000 you owe on the balloon, which will leave you with R10 000.mBut if the dealer offers you R30 000 you’ll need to find R10 000 to settle your balloon. This is where refinancing could come in. If you trade in your car to buy a new one, you’ll have to take out a new loan for the new car – and therefore you’ll owe a larger amount than the balloon payment would’ve been.