A balloon payment tied to your vehicle finance loan gives you access to a few decent benefits, the biggest of which is the fact that your monthly loan repayments will be based on a much lower amount than the original purchase price.

This is because a portion of the total cost of the car is set aside, to be paid at the end of the loan period in a single lump sum. This is your final installment and is referred to as a balloon payment, although it’s sometimes called a ‘residual payment’.

It’s quite an effective way to make your repayments more affordable, and yet, that amount that was set aside at the onset is still your responsibility and will need to be settled at the end of the day.

Unfortunately, a lot of South Africans find themselves getting caught out by balloon payments on their cars. This is largely because taking on a balloon payment with your car purchase does involve a bit of financial savvy in order to manage your cashflow and be in a position to deal with the balloon payment when the time comes.

While it’s all good and well to say, “You should just be responsible with your money so you can handle this payment,” we’d say that this exactly helpful advice. That’s why we’ve researched and summed up the three main options that could help you prepare to to pay off this final installment.

Which of the below tips would you choose when it comes to managing your balloon payment?

1. Pay in the difference

You can give yourself a greater chance of paying off the remaining balance at the end of the term if you choose a savings strategy that suits your budget. A popular way to manage your balloon payment is to save exactly the difference between the original monthly installment and the new monthly installment that was calculated with your balloon payment factored in.

So if your installment would be R5000 and the balloon payment purchase would reduce your installments to R3200 per month, then saving R1800 can help you make a significant dent in your balloon payment at the end of the deal. What your savings doesn’t cover, should be more manageable for you to pay out of pocket.

Just make sure that you notify your bank or financial services provider that the additional money should go towards decreasing the balloon payment amount.

2. Save with interest

Depending on the size of your balloon payment, you might not be able afford this difference that we’ve spoken about. However, you can choose an amount that you’re able to save and deposit this into an interest-bearing account every month, allowing it to build.

There are plenty of options for you to consider, but we would say that opting for a five-year fixed deposit account and contributing monthly is very likely to help you pay off your balloon – and perhaps even have some savings leftover to celebrate with!

3. Refinance the balloon payment

The reality is that even if you have made a plan to put money away for this payment, life may throw a emergency curveball your way and require you to dip into these savings. There is a solution, though.

If you’re unable to pay the amount in full by the end of your finance term, you can opt for refinancing. This is simply a matter of taking out another loan with new terms and interest rates to pay the balloon amount. With the balloon payment settled, you’ll make monthly payments for your new loan.

Before you choose to refinance, give it some careful thought. You will essentially be applying for a new loan, with a new credit agreement and will need a clear credit score to do so. Your credit score will influence how much your interest rate will be, so while you might qualify for a better interest rate on the balance, this isn’t guaranteed.

Additionally, while the prime lending rate may be lower and result in you a paying less interest, it could be higher… in which case you’d pay more.

Basically, refinancing your balloon payment is a viable solution, but you need to make sure that you’ve thought this out. These costs are well worth weighing up before you do anything.

A word to the wise

Can we just say that there are few financial experiences that are worse than taking out vehicle finance (with or without a balloon payment) and getting into an accident or having your car stolen before the end of the loan period.

Not only will you be without your car, but you’ll still have to make those monthly payments.

That’s why car insurance is so necessary! Not only can the right level of cover help you repair or replace your car, but actually, most banks won’t give you finance or even refinance without car insurance.

You’re welcome to use the AA Insurance Supermarket to get up to 10 car insurance quotes from South Africa’s top insurance brands – just click here.

Feeling informed?
We hope that this information will prove useful!

Don’t forget that AA Inform is home to a range of tools and information, including trip fuel calculators, property valuation reports, and advice on whether you should get a warranty, maintenance or service plan for your car.