When you take out vehicle finance many authorised financial services offer customers a balloon payment. Many car buyers wish to purchase the car of their dreams, however they can’t afford to.
Now lenders have offered buyers the opportunity of buying their ideal cars at a lower monthly instalment. Once their car loan term ends they have to settle the remaining amount. This is called a balloon payment, or residual, when you need to pay a lump sum at the end of your vehicle finance period.
Balloon loans are convenient for people who aren’t able to afford to pay high monthly instalments for their desired cars. However, when applying for a balloon payment, you need to carefully plan how you’re going to settle it. What most buyers aren’t aware of is that there is an effective way of settling your balloon refinance even if it’s a large balloon payment.
Here are helpful tips on how you can settle your balloon payment loan.
Paying off your final payment is always a good idea if you have the means to do so. If you know you’re going to have some money at a later stage then this option is definitely for you. The great thing about being able to settle your loan is that you save money in interest and you boost your credit score.
If you would like to pay a small balloon amount, then you should make a big upfront deposit and increase your monthly repayments, that way you won't have a high balloon payment that you will need to pay once your term ends. Before going to your lender about settling, be certain that you can settle, as you could be penalised if you don’t meet the settlement requirements.
If you’re unable to pay the amount in full by the end of your finance term, you can opt for refinancing. Refinancing means taking out another loan with the lender to settle the balloon amount. Once you have settled the balloon amount you can make monthly payments for your new loan.
The reason why refinancing becomes a new loan is that you are in essence applying for a new loan, and according to the National Credit Act - a new credit requires a new credit agreement. When you refinance you can either pay it off within 12 to 48 months. If you’re unable to settle by then you can talk to your lender and find out if you can extend your repayment period.
In order for you to qualify for refinancing you will need a valid South African identification document (ID) or a valid foreign passport, and a few other important documents since refinancing is a new loan application. Be sure to have your valid drivers license, three months’ bank statements, proof of address, and your latest payslip with you.
If you are planning on refinancing, it's important to note that you need a clear credit score. Your credit profile will determine how much your interest rate will be. This is why it’s so important for you to make sure you pay your debts on time every month. A bad credit score can prevent banks from giving you credit or your interest rate will be higher because of your credit score.
Keep in mind that it’s important that you have car insurance. If you get into an accident or experience car theft you will still be liable to pay your lender their money. With so many accidents happening on the road, it is important for you to have insurance. Keep in mind that if your car hasn’t been insured, you won’t be able to receive car refinancing. So it’s important for you to get an insurance quote for your car.
If you can’t afford to pay the remaining balance or you weren’t able to get refinancing you have the option of selling your car. If you decide to trade in your car, you can use the money you received from the sale to settle your outstanding balance.
If the trade in value is less than the amount you owe you either can settle the amount or apply for refinancing. It would be advisable for you to take this option if you have decided on getting a car that costs less. You wouldn’t want to pay for a car only to end up not having one once you have settled it.
Be mindful of the best time for a trade-in, if you agreed to repay the vehicle within 72 months then your breakeven would be from 48 to 52 months. In order for you to benefit from a trade-in, you should wait for the breakeven to arrive. That way you can get more money to settle your loan while still being able to buy or put money down for a new car.
