A Fin24 user writes:
About a year ago I bought a new car, telling the car salesman that I would do so only if my monthly payment stays the same. Well, they organised it easily, but I only realised after signing what I had done.
Yes, I can easily afford the monthly payment, but I signed a finance agreement for 72 months at a 10% interest rate and a R50 000 residual. I hate having this ridiculous debt, knowing that I did not need a new car at the time.
Some people suggest I should just simply pay it off, and others say I should take a bit of a loss in the short run and downgrade to a cheaper car.
What do you suggest? Chris de Kock of WesBank responds:
There is no simple answer to the problem. The following needs to be considered:
- Longer repayment periods as well as balloon payments result in smaller monthly repayment amounts.
The benefit of this is that it allows the consumer to purchase a more expensive car with relatively affordable monthly repayments. However, the negative is that that the customer will remain in debt for a longer period, as is the case with this user.
This is because the settlement value versus market value curve takes a longer period to reach the break-even point.
- Did the customer’s financial situation change from the point when the car was bought? If it did and there is a risk of him not being able to afford the instalment, then it is recommended that he contact the bank in question before the account goes into arrears.
- If the customer’s financial position did not change and he is purely suffering from buyer’s remorse, the following needs to be taken into account:
Taking a loss infers that the customer will sell the car at a loss (which still needs to be paid) and buy a smaller car; in most cases the instalment of the smaller car plus the repayment of the “loss” of the initial car will most likely add up to what the customer was paying originally.
In this instance, we would recommend that the customer keep paying off the loan until the account reaches the break-even point, where the customer will be able to sell the car and settle the loan account without incurring a loss.How balloon payments work
Balloon payments - an agreed inflated final payment of a loan that is paid in full at the end of the loan agreement - can be a useful tool to enable consumers to purchase a vehicle, but it is important to understand how these deals are structured and what it means before entering into any agreement.
A balloon payment is more expensive as it delays the payment of an asset, resulting in an increased interest cost for the consumer. In addition, it will take longer to reach break-even, which is the point at which the amount owing on a vehicle is equal to what the vehicle can be traded for.
However, if someone does not have the cash to make the final payment, there are options available. The buyer can choose to refinance the balloon payment, or trade in the vehicle whereby the balloon payment is then settled and the consumer will enter a new finance agreement.
It is vital that consumers always consult a reputable dealer who will have finance specialists on site to provide them with advice on which financing option is best suited to their individual circumstances.