New WesBank data shows a significant increase in the use of the balloon payment option for vehicle finance this year, a trend that underscores the affordability pressures facing many South African car buyers, says the asset finance group.

The percentage of new-finance deals including a balloon payment rose from 27% in July this year, to 35% in August.

The average size of these balloon payments also tracked upwards, increasing from 33% in July, to 37% in August.

A year-on-year comparison shows a more moderate picture of balloon-payment use over time, indicating that the number of finance deals with a balloon option hovered at around 35% in August last year, while the average balloon-size per deal was recorded at 37% for the same month.

A balloon payment means that the outstanding balloon amount must be settled at the end of the finance term before the consumer can take full ownership of the vehicle.

“There’s a common perception that balloon payments should be avoided at all costs, but they are designed to make monthly vehicle repayments more affordable, allowing customers to purchase a car when they need one,” says WesBank marketing and communication head Lebo Gaoaketse.

He stresses the importance of carefully reading the finance contract, as well as being aware of the repayment terms.

Customers who choose a balloon payment have a number of options available to them to manage the final lump-sum payment, adds Gaoaketse.

He says consumers can start saving for the balloon amount from the beginning of the contract to make the final payment.

There is also the option to settle the outstanding balance by taking out a new loan.

This option of refinancing is treated as a new loan agreement and is subject to credit checks.

The interest rate will be based on the customer’s risk profile at the time of refinancing.

The extension option extends the term of the existing balloon loan.

Instead of a new loan, the original loan term is extended, with a revised payment schedule to settle the balloon amount.

The key difference between refinancing and an extension is that refinancing involves a new loan, while an extension modifies the terms of the existing loan.