Money Matters | Balloon payments, car finance, debt review questions answered

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Personal Finance | Business

Dylan writes:

I am planning to buy a 2020 Nissan Navara for R440 000. They are giving me this deal at almost R65 000 less than the current retail value. I will put down a R35 000 deposit and have a 35% balloon payment. The repayment period is over 72 months at 10.2% interest.

I plan to sell the car in three years, and estimate the retail value in three years, based on current models, to be about R370 000. Is this an advisable option?

City Press replies:

On this basis, your instalment would be about R6 000 a month. This means that, after three years, you would have paid R251 000 to the bank, including instalments and your original deposit. You would still owe R147 000 of the principal debt and the outstanding balloon payment of R154 000.

So, after paying R251 000, you would still owe the bank R301 000 for the car in three years’ time. The car would have already cost you R552 000 – that is R112 000 more than the purchase price, which is all interest.

If you were able to sell it for R370 000, you would only have R70 000 left over for a new car. This assumes that you do not have an accident or excessive mileage, which reduce your selling price.

If you spent R100 000 less (R340 000) and financed over 60 months with no residual, your instalment would be R6 500.

After three years, you would have paid R269 000 and owe R146 000 only on the principal debt with no balloon payment. This car has cost you R415 000, which is R75 000 more than the purchase price, but represents an interest saving of R37 000 compared with the original deal.

Assuming you sold it for R270 000, you would have R124 000 available for the next car.

Balloon payments and long financing periods cost an excessive amount of money. Rather buy a car that you can settle in a shorter period with no balloon payment.

If you are adamant about buying a new car every three years, consider leasing – this can work out to be a cheaper option.

Read: Should I pay extra into my mortgage with these lower rates?

Nicole writes:

I went into debt review in 2017. My Edgars account is paid off. I have R500 left on my Wesbank account. I had a dispute on my credit card and have not paid it for more than three years. Is there a way to get a clearance certificate for these accounts and therefore be removed from debt review?

David O’Brien of Meerkat Debt Counsellors replies:

When you apply for debt review, the accounts included in the process are listed on the form 16 application, and then subsequently on the court order. All of the listed accounts need to be “resolved” for a clearance certificate to be issued.

The debt counsellor, and sometimes the credit bureaus, will require a settlement letter for each of the loans that were listed to confirm that the debt review flag can be removed.

If more than three years has passed without a payment on a loan, then it may have prescribed. You can write to the credit provider and ask them to provide confirmation that the debt has prescribed.

A prescription letter can then be used in the issuing of the clearance certificate. However, please note that the credit provider may have gone to court and received a default judgment against you, in which case the judgment will have to be settled if the loan was listed in the debt review process.

Your debt counsellor should issue the clearance certificate, and update all the credit bureaus if you paid them the restructure fees at the beginning of the process. You can also transfer to a new debt counsellor, who will charge a fee for the work involved in issuing the certificate.

Read: Make sure to monitor those payment holidays

Maria writes:

My brother has been married in community of property for four years and separated for two years. He is a member of the Government Employees’ Pension Fund (GEPF) and submitted forms for early retirement in May this year.

His spouse filed for divorce and my brother was served with papers in September. How will this affect my brother’s gratuity payout and his annuity if the payout is done before or after the divorce is final?

City Press replies:

There is no GEPF rule on how to split the pension on retirement. This will be determined by the divorce agreement. The attorneys will add up the assets of both spouses and then divide that fairly, also taking into consideration other financial obligations such as maintenance for children.

If the divorce agreement requires a portion of the pension to be paid, then his pension value will be adjusted by reducing his years of service for the final calculation.

This will affect both his gratuity and his income in retirement. If the divorce agreement is after retirement, this again would have to be specified by the divorce contract.

She could have a claim to a portion or all the gratuity in lieu of the future income he would receive.

Mpho writes:

I recently read that one can combine or add car finance on to a home loan. Is this indeed so with all banks, and is it a good idea?

City Press writes:

Home loans are usually the cheapest form of financing and it may seem like common sense to use this lower interest rate to pay for shorter-term debt like car finance.

In theory, you save money by paying a lower interest rate, however, most people forget that a car is generally financed over five years, whereas a home loan is usually financed over 20 years.

If you end up paying off your car over the period of your home loan, you will pay significantly more.

Let’s look at an example – suppose you want to buy a car for R300 000. You get car financing at 10.5% over five years with a monthly repayment of about R6 500, which would cost you R390 000 over five years. That means you pay R90 000 in fees and interest.

Instead, you decide to use your home loan, which you have been paying off and now have 15 years left to repay.

You have an access facility that allows you to take out the equity that you have built up.

Rather than paying 10.5% interest on your car financing, you draw the money out of your home loan and you only pay 7% interest.

Your bond instalment would increase by R2 700 a month. This seems so much cheaper than paying the R6 500 a month on the car finance.

Read:The debt repayment defaults have started

But what is the financing really costing you?

By the end of the 15 years, you would have paid R486 000 for that car, of which R186 000 is interest – more than double the interest paid when using the car financing option.

The only way to really save from the lower interest rate is to increase your mortgage repayment by the same amount that you would have paid each month for the car finance.

In this example, if you increased your mortgage payment by R6 500, you pay off the car in 37 months with a total cost of R330 750.

That is R60 000 less than the car finance would have cost you.

The same calculation applies to any debt you consolidate into your home loan. Only use your home loan if you have the discipline to pay off the debt over a short period of time.


Maya Fisher-French 

Personal Finance Editor

+27 11 713 9001
69 Kingsway Rd, Auckland Park

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