OPINION | Beware balloon contract conundrum
That’s invariably what somebody in a smart, air-conditioned corporate office with the benefit of a fine education and generations of experience of entering into contracts says when a consumer claims not to have known about a tricky clause in a contract.
Buyer beware; read the contract, all of it. Yes, I’ve been saying that, over and over, for two decades. But how easy are contracts to understand? Who were they written by and for who? Consumers who emerged from the not-so-good side of SA’s social engineering system? I think not.
Companies’ mission statements speak of “total commitment to customer satisfaction”, of “ensuring customers are treated fairly” and the like, but their measure of fairness often excludes the realities of their target market.
Is it fair, for example, to expect a 20-something first-time car buyer from a family which has never owned a car, to spot the fact that after they’ve made 71 monthly payments of say, R4,000, one final payment of about R80,000 is due – when the amount is in tiny print with no “eye-catching” mechanisms such as bolding, italics or boxing?
I’ve seen many contracts where the words “balloon payment” do not appear, and the final massive amount sits there, small and quiet, easy for the eye to gloss over.
Given how many people have complained that their salesman or “finance person” didn’t mention it, and they unwittingly signed a “balloon” deal, the design of both the motor dealership’s invoice and financing bank’s contract should make that “balloon” float off the page and dance in front of the buyer’s eyes.
It may not be illegal to make no attempt to ensure consumers don’t miss it, but in my view it’s unconscionable. Especially when balloon deals are on the rise as car prices soar but our incomes don’t.
This is how it works: Take the advertised price, add the extras (mostly not needed and certainly overpriced), add interest over the full-term, then, to get to an affordable monthly instalment, carve out the “final payment”, then divide what remains by 60 or 72 months.
In June, I wrote about Dudu Koloi’s balloon disaster. She assumed that in November she’d have totally paid off her Kia Rio, but found she had a balloon payment of R70,000.
Conceding that their usual disclosure policies around financing were not followed in Koloi’s case, Nedbank’s Motor Finance Corporation has since lowered the interest rate on her agreement and extended the term by a year to absorb the balloon payment, meaning she’ll pay her current instalment for an extra year, and then owe nothing further.
But since Koloi’s story was published, several others have e-mailed me saying they too had unwittingly signed a balloon deal. “No-one told me anything about a balloon amount when we were busy negotiating and signing the documents for my car in March this year,” said Valencia Mawela. “It’s a 2014 Hyundai Grand i10. Only after they sent me the contract two weeks later did I realise there was a balloon. When I asked the saleswoman about it, she said she’d speak to her boss but she never got back to me.”
A screen-grab of her WhatsApp exchange with the saleswoman reveals the latter’s dismissive attitude.
In “Thipi’s” case, the “surprise” balloon payment is a huge R170,000, due in November, after five years of paying R5,800 a month.
She had traded in her Golf 6 on a 2013 BMW 320i and says she specifically told the salesman she didn’t want a “residual” [another term for a balloon payment]. “He said it wouldn’t be a problem as I was trading in my car.”
Even when I highlighted the payment details on Thipi’s contract for her, she battled to pinpoint where that R170,000 “final” payment was disclosed.
A BMW Financial Services spokesman said “Thipi” had “signed and initialed the documents in all the locations required by the National Credit Act”. “We remain in touch with her to work through options on the financing of the balloon repayment”.
I pose the question I ask of all motor financers: "Given that there is never any proof of what the salespeople disclose or fail to disclose, wouldn’t it be appropriate to make sure that a very large final payment is virtually impossible to miss?”
He said the final (balloon) payment was also included in all statements of account sent to customers, but undertook to raise the issue of the contract payment design.
The industry needs to do a lot more to ensure that no one signs a car deal not realising that the finance person only arrived at that monthly instalment amount by slicing off a big chunk of the financed amount and “parking” it for five or six years.
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