Car finance: How do balloon payments work?

When choosing car finance, you have a few options to consider. One of the terms you might come across is ‘balloon payment’. This is the lump sum you would pay at the end of the finance term. With balloon payments, the monthly instalments are usually lower but that’s because you are paying in a final amount at the end of the agreement.

Let’s consider this as an example: James is buying a new car for R350 000. He doesn’t have a deposit, so he’ll be financing the full amount. If the interest rate is 10% and the car is financed over 60 months with no balloon payment, James will need to pay around R7 531 a month.

If James chooses to include a balloon payment in his financing, for example, 30% (R105 000), then his monthly repayment would be lower, around R6 175. However, at the end of the five- year term, he would still need to settle his balloon payment.

1. 1. Trading in your car for a newer model and using the amount you receive for your old car to settle the payment.
2. 2. Refinancing the payment with the bank so you can continue to pay it off.
3. 3. Using other savings you have to settle the payment.

The advantage of including a balloon payment is that you lower your monthly costs, however, you’ll end up paying more in interest over the life of the loan as the loan amount will not be decreasing as quickly. 

If you’re in the market for a new car, be sure to check out MotorHappy’s online marketplace, where you can find thousands of previously loved cars for sale, all with a proven service history. MotorHappy can also help facilitate finance and insurance for your chosen vehicle. You can also use our handy finance calculator to work out your monthly instalments.