How do balloon payments work?

When you buy a car and choose to finance it, you have a few options to consider. These include over how many months you want to pay off the car, and whether you want it to be fully paid off at the end of this period, or if you’ll have a balloon/residual payment, which is a lump sum that is due at the end of your repayment period.

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.

If you opt for a balloon payment you can choose one of the following ways of settling it:

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.