Vehicle finance balloon payments in decline
Johannesburg - The percentage of South Africans using balloon payments to finance vehicles has declined dramatically over the past four years.
The balloon payment is a bulk final payment of the loan at the end of the finance agreement.
According to Chris de Kock, head of sales and marketing at WesBank, the data indicates that the number of South Africans choosing balloon payments as part of their vehicle finance contract fell from 22% in July 2007 to 9.5% in June this year.
Standard Bank Vehicle and Asset Finance is seeing a similar trend.
Keith Watson, director of strategy and business support at Standard Bank, says about 10% of vehicle buyers currently choose a balloon payment; the 2007 percentage was about twice that.
He said it's possibly an affordability issue.
Before the National Credit Act came into force, finance contracts were largely restricted to 54 months, involving slightly higher instalments.
Provision is currently made for 72-month finance contracts, or in some cases even 84 months.
The need for a balloon payment has reduced because the longer finance term lowers the instalments, he said.
De Kock said the decline in the use of balloon-payment options also indicates that people have become more aware of how their finance contracts are structured.
He reckoned that these days people are also smarter about credit and less inclined to buy cars they cannot afford.
The coming into force of the National Credit Act in June 2007 also played a big part in the gradual decline of balloon payments, said De Kock.
He said the act made provision for finance contracts with a longer payment period.
Customers who financed a vehicle with a balloon payment to make it more affordable now have the option to finance the vehicle over a longer period without a balloon payment, without their instalments increasing significantly.
De Kock said it was very important for vehicle buyers to understand the implication of balloon payments.
He said balloon finance is more expensive because it postpones paying off the asset, leading to higher interest charges for the buyer.
Balloon payments also result in it taking longer to reach break-even point. This is the point where the amount still owed on the vehicle equals the amount for which the vehicle can be traded in.
For example, a vehicle financed over 72 months without a balloon payment will reach break-even at 44 months, while the break-even point with a 20% balloon payment will only be reached only at 58 months.
At the same time, said De Kock, a vehicle financed over 72 months with a 10% balloon payment will increase the buyer's interest charges by 8%-odd.
About 65% of WesBank’s customers who choose balloon payments will, at the end of the finance contract, ask for the balloon payment to be refinanced.