What a balloon payment will really cost you

2012-02-11 10:47

“I have been quoted R220 000 for a new Mini with a balloon repayment of about 40% and I can afford it. My dad is discouraging me saying the balloon repayment can be problematic in the future.

“How bad can a balloon repayment option be?” asks Ntswaki.

Using Absa’s online calculator it is clear what the impact of a balloon or residual payment would be.

I assumed the dealer has also maximised the payment period to 72 months to make it appear more affordable.
Finance over 72 months with an interest rate of 10% and a 40% residual:

» Monthly repayment:
R3 179

» Residual amount payable:
R88 000

» Total cost:
R316 888

Finance over 72 months with an interest rate of 10% and no residual:

» Monthly repayment:
R4075

» Residual amount payable:
R0

» Total cost:
R293 400

The residual has cost you an additional R23 488 in interest. You also need to have R88 000 cash available in order to settle the residual payment.

If, like most people, you re-financed the R88 000 over a further three years, the total cost would be R419 092.
You would have paid nearly R200 000 in interest – almost the price you paid for the car.

As a matter of interest, based on the depreciation rate of the Mini, after six years the car would be worth R100 000.

Now this is not a good investment.

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