*This post is neither an endorsement, nor a detractor of the product mentioned, and should not be used on its own to make a decision that may have an adverse impact on your finances
What is Balloon payment or residual finance?
Balloon or residual finance is a type of vehicle finance in which a large lump sum payment is required at the end of the loan term. This payment is typically much larger than the regular monthly payments and is often referred to as the "balloon payment."
The idea behind balloon finance is to make the regular payments lower and more manageable, but then require a large payment at the end to pay off the remaining balance. It is important for borrowers to plan for this payment and have a solid plan in place to pay it off.
Balloon finance is often used for car loans, but may also be used for other types of asset financing.
An example:
If you bought a car valued at R200 000 with a balloon payment of 30%, it means that, monthly, you will be paying off the principal amount of R140 000, while paying interest on the full R200 000. At the end of the finance term, you will be expected to pay a lumpsum amount of R60 000, the 30% residual value.
You may settle the amount owing in cash, refinance the outstanding amount or sell the car off for a "residual value" and settle the amount owing.
Who should NEVER consider using a balloon or residual payment finance
No 13th, 14th or 15th cheque as part of your employment contract
Regular annual income escalations, e.g. 3% per annum salary increases
Financially ill-disciplined
Low or no expectations of a growth spurt in income
When it's the ONLY way to afford a car
Who CAN consider using balloon or residual payment finance
Individuals with high-income growth
Professionals who experience above average income growth phases, from training(articles) to skilled to experienced stages, e.g. lawyers, engineers, CAs, etc
Earn 13th, 14th or 15th cheques you can use it to pay off the residual
Expectation of a lumpsum windfall during the finance period. E.g. inheritance or maturing investment/endowment
Earns extra income at regular intervals, e.g. dividends, interest, royalties that can be paid towards the residual value
Financially disciplined to stick to, and execute the initial plan
Personally, I have never financed a vehicle on residual, but I can see how it can be a nifty tool when used correctly in conjunction with supportive parameters.
Are there any other attributes you can think of, that make a balloon/residual finance either a no-go zone, or a useful tool? Would love to hear your thoughts
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