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Balloon payments over-blown?

2013-09-27 11:01
car, sale

POPPING THE BALLOON-PAYMENT BUBBLE Balloon payments may seem attractive to cash-strapped car-buyers but could become a huge financial burden over the course of a few years. Image: SAPA

Motor shows are a lot like sweet shops - you want everything you see. Visitors to the 2013 Johannesburg auto show will be no different; WesBank marketing boss Chris de Kock reports, however, that only 50% of vehicle finance applicants "actually get it".
 
The trouble with motor shows is that they are like sweet shops - you want everything you see. Visitors to upcoming 2013 Johannesburg International Motor Show are the same.

However it’s one thing to want a car, quite another to own it. Potential buyers need to follow advice from banks before signing away a large slice of their monthly income for a few years.

'NEED TO BE REALISTIC'
 
WesBank sales and marketing head Chris de Kock said: "Buyers need to be realistic. Only about half of those who apply to WesBank for vehicle finance actually get it." And according to Standard Bank, 9.53-million South Africans had a 'poor' credit record in September 2013.

The National Credit Act, since its introduction in 2006, has changed the way vehicles are financed. Buyers used to pay a (minimum) 10% deposit and repay the balance within 48 months. Today banks are no longer obliged to demand a deposit (though they still do in about 25% of cases, reports WesBank) and there is no limit on the repayment period.

As a result, banks report that most finance applications are for deals over 72 months (six years).
 
LONG-TERM COST

A longer period may make monthly repayments more affordable but they also tie customers to the vehicle for longer. Many are able to trade in the vehicle before the due date but for those who don’t, there is the potential for added costs once warranties and service plans are exceeded.
 
Another factor to vehicle ownership most don't consider is fuel. According to Websbank, in 2010, it was estimated that fuel contributed 28% to the total ownership and running cost of an entry-level car financed over 60 months (five years). In 2013, that figure has increased to 37%.

Over the same period, the share of finance repayments fell from 51% to 43%. Wesbank reports: "In other words, the cost of fuel over those five years is nearly as much as you pay to own the vehicle."

THE BALLOON DEAL
 
Potential car onwers should think particularly carefully before committing to a “balloon” deal.
 
A balloon payment is an inflated final installment, typically equivalent to 25% - 35% of the vehicle’s value. In effect, it is a vehicle deposit deferred until the end of the finance period.

The trouble is, as banks admit, that many customers don’t understand balloon payments.

Wesbank said: "All they can see is the opportunity to buy a shiny new car without having to put down a lump sum. What they don’t consider are the possible problems five or six years down the line."
 
When the finance period ends, owners may find they still owe more than a quarter or even one-third of the original price of the car.

'CONSUMERS DON'T UNDERSTAND BALLOONS'
 
De Kock calculates that a driver purchasing a R200 000 vehicle over six years with a 35% balloon, will still owe R70 000 at the end of the payment period. De Kock said: "Most people who fail to pay off the vehicle before then, refinance the outstanding debt over two years. So a six-year repayment becomes an eight-year one."
 
Absa’s head of vehicle and asset finance Wessel Steffens said many customers don’t understand what they are getting themselves into: “This type of financial deal must be clearly communicated with the consumer before entering into an agreement.”
 
Standard Bank head of vehicle and asset finance Sydney Soundy said: “I don’t think consumers understand balloons. Sales staff should take more time to explain.”
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