If you're considering choosing a balloon payment when financing a new car, you're not alone. South African banks report that as many as a third of car loan customers are choosing the maximum balloon payment to reduce their monthly repayments. However, it's wise to consider the long-term impact before committing to a balloon payment.
Ernest North , co-founder of car and home insurance platform, Naked, says balloon payments have become increasingly popular in South Africa due to the rising costs of living, including the higher costs of car purchases and ownership. However, many consumers go for a balloon payment without understanding that they could get caught in a debt trap four or five years down the line.
"Lowering your monthly repayments can help you to stretch your salary a bit further and potentially afford a better car," says North. "But the lump sum at the end of the loan term is the sting in the tail. While a balloon payment can be a useful financial planning tool, all too many people find that they struggle to afford the final repayment."