Bursting bubbles about balloon payments

If you thought that a balloon payment is a cool thing – and that the balloon is filled with streamers and confetti, then you have a surprise waiting for you.

I cannot begin to describe how evil this is – it makes me start bleeding out of all my orifices all at once.

Why this came into being

You spotted an ad for a new car. It’s a beautiful car with 12 doors, a 6-liter engine and 1 000 000 000 horsepower. It is so phenomenally advertised, that it will make loads of women rip off their clothes and lie all over the bonnet of the car.

You know you want this car. It will make all your dreams come true.

The only issue is you cannot afford it.

You now need to think about options:

  1. Sell your soul and body to the highest bidder
  2. Sell both your kidneys
  3. Rob a few banks (No offence, Rob)

This becomes a huge issue, as you sort of like your soul and kidneys. You also prefer not being in prison while your awesome new car is outside prison.

The loan sharks lenders decided to make it more ‘affordable’.

How it works

When you want to buy the car, lenders want to milk you dry. You also cannot expect the seller to drop their price!

What lenders are willing to do is “defer” the amount that needs to be paid. 

The process works something like this:

  1. Your bank gives the car salesperson the full amount for the car.
  2. You pay interest on the full amount back to the bank. 
  3. You don’t pay back the full amount owed in the amount of years specified. This means your monthly repayment will be less than if you did.
  4. When the term is over, you still owe them money, and you need to pay it to them immediately. Like IMMEDIATELY.
  5. You then jump off a cliff, as you don’t have that type of money available in your bank account.

As with everything financial (except for money coaches), money lending and balloon payments are (sort of) regulated. 

Sadly, it doesn’t cater to people’s spending habits and this can hurt your finances about as much as Eskom is hurting South Africa. 

This is why many people are financially ruined by balloon payments.

Conclusion

If you can avoid balloon payments, then do it. 

Few people have the ability to save that amount of money for repayment at the end of the term.

Read your car finance documentation very carefully before you sign – paying particular attention to the repayment section, specifically any reference to a final payment. 

Now, go – and don’t ruin your finances with balloon payments.

Don’t ruin your life

Happy investing in other things, not in debt.

Sources
Weekly updatesGet updated when Frugal writes new blog posts!

Get the frugal newsletter!