Balloon payments: don't get carried away

So you’ve decided that it’s time you got your own 4-wheeled baby or upgraded your current one to something better… you know what you want and nobody can stop you, right? Well when it comes to buying a car, there are a number of different factors to consider – one of the biggest being finances.

It is very important to think about affordability when buying a car, which includes your monthly repayments and running costs. Dealerships and finance houses have taken into consideration the depth of consumer pockets and have constructed a number of financing plans, one of which is balloon payments. A balloon payment is a larger payment sum which is added to the initial finance amount that enables you to pay lower monthly premiums for an agreed period of time before having to settle the final payment.

There are two types of balloon payments that you may find yourself considering:

  • Ownership residual – this applies when you are buying a car and are responsible for the balloon payment at the end of your loan term; and
  • Non-ownership residual – this means that your finance house still owns the car at the end of the loan term and is responsible for settling the balloon payment, usually through resale. This is like a lease agreement

While you may have the pending stress of having to repay a lump sum very soon, it may come in handy to know that some finance houses allow you to convert your original balloon loan into a ‘traditional’ loan that will be easier to payback. This revised payment plan can be structured closer to the end of your loan term or on the date when your balloon payment is due. Should you not be able to repay the amount as you initially thought you would and you don’t want to refinance, you can trade in the vehicle to settle the balloon payment.

As much as this type of agreement can come with more affordable monthly debit orders, it can also come with other associated risks, and it is very important that you understand the terms of your agreement. Should anything happen to your vehicle, your financer will still need to be covered – and thus the importance of being properly insured. Some insurers may offer you an option to cover your residual payment for a slightly higher monthly premium.

When signing on the dotted line, be sure to have clearly read and understood what you are signing and what you are getting yourself into with the agreement. The last thing you want is a nasty surprise when you think you’re done paying for your car.

Being properly insured can help you get back on your feet and on the road again should anything happen to your 4-wheeled baby. Buy comprehensive car insurance from MiWay today.

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