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Are you ready for a new car? Pros and cons of balloon car finance

When you decide to purchase a car at one of the many car dealerships in Gauteng or elsewhere in South Africa, it cannot be on a whim. Many people who decide to buy a car haven’t saved up for a downpayment or to even pay the entire amount upfront, which is why they settle for finance. Often, people overextend their budget for financing because they want to drive the latest and greatest vehicle that they cannot afford. And this is when balloon payments become tempting.

With little knowledge or experience in dealing with car dealerships, financing or purchasing a long-term investment such as a car, it’s easy to get caught up in what sounds like a feasible plan. Balloon payments sound like a good idea when you’re excited and ready for a new chapter in your life. But it’s important to note that these payments come with an unexpected twist: the remaining balance.

In short, a balloon payment is referred to as the amount you need to repay your lender after you’ve completed payment on the allocated timeframe of your contract. Be it three, five or seven years, you will need to repay the remaining balance to the lender in full. It might be thrilling to be able to afford cheaper payments while driving around in your fancy car, but you still need to bear in mind that you will need to somehow save, take out an additional loan or sell the car to be able to pay the lender back.

Each person has their own reasons for taking out vehicle finance and, with that being said, there is no particular right or wrong answer to what you should or shouldn’t do. What you choose to commit to is what you are able to afford in a particular moment in your life, however, it’s important to have a clear understanding of what you can expect to experience with a balloon finance plan.


Pros of balloon loan payments

One of the biggest perks of committing to a balloon payment at a pre-owned vehicle dealership

is that you will be exposed to lower repayment amounts. While it might sound exciting and ideal for your circumstances, speak to a professional about what “cheaper” repayments mean in the long-term for you.

Balloon payments are excellent when done for the right reasons. They work best for people who are not looking to drive a particular car for a long period of time or need the additional cash for other living expenses. It’s also an appealing finance model for people who want to drive new, top-of-the-range vehicles every couple of years or for people who do not have access to any downpayment savings that would lower their premium rate in normal circumstances. If you choose to apply for balloon finance through a dealership or lender, you will likely be given the options of selling the vehicle at the end of your payment period or paying the outstanding amount and keeping the vehicle.


Cons of balloon loan payments

With every good deal, there are some disadvantages. One of the risks with a balloon payment on a pre-owned or second-hand vehicle is that over time, you might find yourself paying back a lump sum that is more than the car’s actual value. Another con is that you might have to refinance your vehicle over a certain period of time in order to help you pay back the amount owed to your lender. Even if it feels like you are paying less for more, always consider how much the interest rates are going to grow during the time that you are paying off your vehicle as well as the repayment amount.


Final thoughts

Speak to professionals at various second-hand car dealerships in Gauteng to assist you in weighing up the best options for your current financial situation as well as your future. There are plenty of finance options to choose from, and if you know what your lifestyle needs are and what you are able to afford, you will be able to find a car and payment plan that works best for you. Shop around for finance options without over capitalising on your budget. If you choose to settle for a balloon payment, always consider whether or not you will be able to pay the remaining amount after a certain amount of years. Don’t commit to an impulse decision and make sure that you know what the implications are of a “cheaper” deal.

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