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Stay away from balloon payments


   05 May 2017   l   Paul Smith    l   Views: 280   l   5 months ago  

 

Photo for illustration purposes.


With ever increasing vehicle prices, it is obviously becoming extremely difficult to buy the vehicle of your dreams. 

Besides, our obsession with cars and the status that our mode of transport projects, means that we have to keep up with the Jones’. 

Vehicle manufacturers know this and in order for them to keep selling their products, they have to make car ownership more affordable in the short term. Since the 2007 inception of the National Credit Act more vehicles are sold without a deposit and financing contracts have become longer. 

This has made monthly repayments more affordable, but the long term effect of not paying a deposit, paying interest over a longer financing period and having balloon payments at the end of it all, does not make financial sense. 

Some manufacturers promote a guaranteed “buy back” that is in essence a balloon payment. What it boils down to, is that the buyer pays a monthly instalment for a period, let’s say 48 months, and the dealership then buys back the vehicle, subject to conditions, at a price equal to the outstanding amount not financed. 

This means that you pay 48 monthly payments toward a car that will, at the end of the contract, have no value to you. 

The vehicle will also not reach the point where it is worth more than the outstanding amount during the contract, which could land the buyer in deep financial trouble should he need to get rid of the vehicle because he can no longer afford the monthly in-stallment.

Vehicles should form part of a sound financial plan and in order to keep with sound principles, buyers should contribute a deposit as big as possible and finance the vehicle over a shorter period.

Consumers should stick to vehicles they can afford and rather stay away from balloon payments and buyback schemes simply to impress the neighbours. 

 


 

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