Gauteng, South Africa -- (SBWIRE) -- 02/01/2013 -- WesBank – South Africa’s leading asset-based financial solutions provider - explains the finer points of vehicle finance and balloon payments with commentary by Chris De Kock, Head of Sales and Marketing at WesBank.
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.
Chris De Kock, Head of Sales and Marketing at 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 of time as is the case with this customer. This is because the Settlement Value versus Market Value curve takes a longer period to reach the breakeven point.
- Did the customer’s financial situation change from the point when the car was bought? If the customer’s financial position changed and there is a risk of them not being able to afford the instalment, then it is recommended that the customer make contact with the bank before the account goes into arrears.
- If the customer’s financial position did not change and the customer is purely suffering from “buyer’s remorse” the following needs to be taken into account:
1. Taking a loss infers that the customer will sell the existing 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 reached the breakeven point where the customer will be able to sell the car and settle the loan account without incurring a loss.
2. 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.
3. 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 a balloon payment 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.
4. 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.
WesBank has over 40 years of experience in asset and vehicle finance. As a leading asset-based finance provider in South Africa, we finance new and used vehicles for personal use, both privately and through dealerships, as well as leisure vehicles, and also offer expert advice and professional service to our clients.
Our other main focus is providing quality asset finance and fleet management solutions for a number of market sectors. WesBank’s asset finance services cover aviation finance, agri finance, commercial vehicle finance, company vehicles, plant equipment, office equipment, public sector finance and franchise finance. In addition, we offer personal insurance, vehicle insurance, personal loans as well as business insurance, and we are perfectly placed to structure a finance deal to suit your needs.
WesBank is a division of FirstRand Bank Limited, which in turn, is part of the FirstRand Group. FirstRand is South Africa's most innovative Bank Assurance Group with interests in Retail and Merchant Banking, Life Assurance, Financial Planning and Medical Schemes.