If the only way to get your car instalment down to a number you can afford every month is to carve out about a third of the total amount owing on the financed deal as a “ to be dealt with in six years” balloon payment, you really can’t afford those wheels and should opt for something cheaper.
That’s good advice, but given that car prices have increased between 30% and 40% in the past two to three years, along with the price of petrol and insurance, buying with “a balloon” is the only option for increasing numbers of South African cars.
First-time car buyer Dudu Koloi bought a new Kia Rio from a Kia dealership in Gauteng in May 2016 but only recently discovered that after she’s paid her R4 700 a month for another four years – six years in total – she will still owe R70 500 on the car.
She was horrified, and adamant that no-one at the dealership had said a word about a balloon payment.
“They just talked about the contract being for 72 months.”
But she signed the contract, so she must have known, surely?
Well, yes, she did sign a Motor Finance Corporation (MFC) contract which discloses that very large final payment, but not in a way that’s very easy for an inexperienced first-time buyer to notice.
It’s in tiny print, not highlighted in any way, and the customer is not asked to initial next to it, to ensure that they realise what they’re committing to.
“If I’d known about the balloon payment, I wouldn’t have taken the car,” Koloi said. “And I have since discovered that many people get into these balloon payment deals without realising it.
“I have a baby now who I need to save money for and this is putting me in a difficult position. I cannot afford such an exorbitant amount.”
With VAT and R17 000 of extras – that’s another story – the price of the car was R255 000. With interest, that swelled to R406 000. Off came that “balloon payment”, leaving her with around R33 000 to divide into payments over six years.
Responding, Nedbank division MFC managing executive Trevor Browse, said Koloi had signed both the pre-agreement quote and the instalment sale agreement acknowledging that her last payment was different from the regular monthly payments.
The person who had arranged her financing no longer works at the dealership, he said, “so we are not in a position to confirm the detail of their face-to-face discussion”.
But after a client has bought a new vehicle, he said, “we schedule a welcome phone call, which is recorded, to explain and confirm the interest rate, term structure of the loan, balloon payment amount and date, monthly instalment amount at the current interest rate, and proof of insurance”.
But Koloi insisted that no such discussion took place, and requested the call recording.
Then Browse said this: “The head of MFC client services has listened to the welcome call to Ms Koloi in 2016, a few days after she took delivery of the car.
“While the specific conversation did not detail the finance agreements, the agent did advise and confirm that the final agreement would be sent to Ms Koloi for her records.”
Right.
So what now for Koloi?
When she’s done paying R4 700 for six years, she can apply to re-finance that R70 000 still owing, in which case she’ll pay interest on an amount that’s already includes interest, or she can sell the car, and get very little out of the deal because of that massive amount still owing,
Or, as MFC puts it, she can “pay the full balloon payment amount and take ownership of the vehicle”.
Pressed to respond to the observation that the documentation does not highlight the massive final payment in any way, Browse said: “Thank you for the recommendation to make the line regarding balloon payments more clear, especially where first time buyers are concerned.
“We have passed this on to our legal, compliance and ‘Treat Customers Fairly’ market conduct team to explore ways in this regard, taking into account all the other detail that generally comes with the purchase of a vehicle.”
He also undertook to “find a resolution in the matter of Ms Koloi”.
A small glimmer of hope for her, one hopes.
lA lot can happen to a person’s financial status in six years; they could no longer be eligible for a new loan, due to an impaired credit record, or the new finance deal could carry a much higher interest rate.
But Wesbank’s brand and communications head Rudolf Mahoney says very few customers keep their cars for the full six years.
“The average replacement cycle is 44 months – that’s when the average motorist wants a new car.”
With break-even point – when the consumer no longer owes the bank more than the car is worth – being only at around month 54 or 55, that creates challenges for the dealership, Mahoney says.
“The consumer who decides they want a new car in month 44, needs to pay the remaining instalments and the dealer is under pressure to come up with some kind of trade-in assistance to get the deal.”
CONTACT WENDY:
E-mail: consumer@knowler.co.za; Twitter: @wendyknowler..