Lower instalments come at a cost

Many first-time car buyers still fall into the trap of buying cars with a residual value or balloon payment without understanding the repercussions.

Nokukhanya Dlamini, 39, of KwaMashu in KwaZulu Natal recently discovered that she had to repay a balloon payment of R260000 on a BMW she bought five years ago.

Dlamini said she was unaware that she was not paying interest on her car finance until mid-March this year.

She purchased a BMW worth R700000 and paid a deposit of R40000 and not the required 10%, as she could only raise that amount, she said.

The sales consultant asked her what she was willing to repay for the first five years, and she opted to pay R5500, which increased by R100 each year .

She said she was surprised when she received text messages requesting her to contact her financier.

"On calling the financier, I was told the car was about to clock 80000 kilometers so I should either pay the balloon amount, or bring back the car for a new and latest model," Dlamini said.

This was never discussed when she signed her contract, she said.

"As a single parent, I would have not agreed to this as I would have known that I would not be able to raise a balloon payment because school fees mount every year," said the mother of three.

Dlamini has refinanced her car for a further R260000, as she cannot do without it.

Nelisiwe Baloyi, who heads Absa Vehicle and Asset Finance - not the financier of Dlamini's car - said most people got caught up in the excitement of buying a new car and neglect doing their homework.

Baloyi said because South Africa has just emerged from a technical recession, most consumers were still under pressure.

She advised consumers to first consider whether they could afford to buy their dream car or not.

Consumers should also decide whether the vehicle will be for business or personal use, because this affects the amount payable for the vehicle insurance policy.

Baloyi said buying a vehicle with a balloon or residual payment made a vehicle more affordable, but consumers get locked in a finance period which is over 72 months, with a balloon payment.

Though this option created flexibility in cash flow, it could be expensive because there was more interest repayable.

She said a further disadvantage was that the trade-in value may not be fully realised.

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