I’ve heard so many different theories on the balloon payment loan and why those who favoured it thought it was the best option, while those who were against it thought it was a bad idea.
My friend recently bought a car on a balloon payment loan. What she didn’t research was the balloon loan agreement which she signed into, and what it meant for her finances at the end of her 60-month payment period.
So, what is a balloon payment? Here’s a practical example. I walk into a car dealership and I see a Jeep Rubicon, my dream car, and my eyes start seeing stars and hearts. I approach the salesman and inquire about the car. He tells me the car is R600 000 and after calculations, he tells me I need to pay an instalment of R14 000 over 60 months. My eyes are no longer seeing stars and hearts because they’re on the floor. I try negotiating with him, “Well, I can’t afford R14 000 per month, I can only do R10 000,” and he says he can add another 12 months and the instalment will go down to R12 000.
Instead of walking away or looking at a less expensive car, because I clearly can’t afford my dream car yet, I say, “I really can’t do R12 000, R10 000 is the highest I can go. Isn’t there anything we can do?”, and those words are music to his ears because there is something that can be done, and just like that, you’re introduced to balloon payments. He now tells me that he’ll put a 25% interest on my deal, so that I can pay the R10 000 that I can afford. Instead of me asking what this entails, I sign myself into bigger debt.
A balloon payment is a lump sum that you pay at the end of your 60-month payment period. So, I’ll pay R10 000 per month for 60 months and at the end of it, I’ll have to pay another lump sum of about R100 000. What they’ll do is give me a loan of R500 000 loan for a car worth R600 000, so that I can pay my R10 000 instalment. After 60 months, I must still pay off the difference. That’s a balloon loan payment.
Abenathi Gqomo
