How Does Balloon Payment Work in South Africa
What exactly is a balloon payment?
A balloon payment is a large payment payable at the end of the term of a loan.
How does balloon payment work in South Africa?
The balloon payment method divides your loan into set instalments that compel you to repay the principal at the end of the specified period. It is designed in such a way that the loan’s initial payments are lower but the ultimate payment is higher. For example, suppose you take out an R180 000 automobile loan with a five-year repayment period. Your balloon payment will be R36 000 if you make smaller payments that only cover 80% of the loan.
How can I pay off a balloon loan?
There are three ways to repay a balloon loan:
1. Make a one-time payment. If you have managed to save during the course of the loan, you simply pay off the balloon payment when it is due.
2. Sell the property. For example, if you have a balloon payment mortgage, you can sell the home you purchased with the loan. You then use the proceeds from the sale to pay off the remaining loan.
3. Refinance the loan with another loan which have advantageous repayment terms.
What happens if you are unable to make the balloon payment?
The lender may foreclose on your property if you are unable to make the balloon payment, which could negatively affect your credit and make it more challenging to obtain loans in the future.
What are the advantages of balloon payment?
1. It lowers your monthly payments.
2. Leaves you with more disposable income.
3. A deposit is usually not required.
4. You will pay a lower monthly repayment fee.
What are the disadvantages of balloon payment?
1. You may pay higher interest.
2. Balloon loans have shorter payment terms
3. Inability to afford a balloon payment may lead to a cycle of debt because you will need to refinance it.
