A balloon payment can help reduce your monthly instalments on your car but be careful.

Here’s how it works: A portion of the car’s price is removed from the amount you pay off in instalments and then gets paid as a lump sum at the end of your contract.

Here’s an example:

But in five years’ time you’ll suddenly need to pay R22,500 in one go. Plus, you end up paying more interest!

In the same example, if you don’t have a balloon payment on that car, it would work like this:

So your monthly payments are higher but you don’t have to pay R22,500 in a lump sum at the end of your contract. And you pay less interest in total.

If you take a balloon payment you may be able to refinance it and pay it off in instalments, but this would be mean more monthly payments and more interest. Also, your car can be repossessed if you can’t pay or refinance the balloon payment when it’s due.

It’s generally wiser to avoid having a balloon payment, and instead reduce your monthly instalments by saving up for a deposit.

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