The pros and cons of balloon payments

A balloon payment allows motorists to set a percentage of the vehicles purchase price aside and finance a lower amount, which results in lower monthly payments.

New data from financial services provider Wesbank has revealed a significant increase in the use of the balloon payment option for vehicle finance, as South Africans battle the affordability pressures of a tough economy and the rising prices of new cars.

The percentage of new finance deals including a balloon payment rose from 27% in July 2025 to 35% in August 2025. The average size of these balloon payments also tracked upwards, increasing from 33% in July to 37% in August this year.

What is a balloon payment?

A balloon payment allows motorists to set a percentage of the vehicles purchase price aside and finance a lower amount, which results in lower monthly payments. At the end of the contract period, the amount that was set aside, which is called the balloon payment, is still owed.

How does it work?

Balloon payments are designed to make monthly vehicle repayments more affordable allowing customers to purchase they car need or want and pay a monthly instalment that suits their budget.

However consumers need to remember that at the end of the finance term, the outstanding balloon payment must be settled before ownership is transferred from the financing institution to the motorist.

What does this mean in practice? In basic terms, if you buy a car for R400 000 and finance it with a 40% balloon payment the initial contract period will see you pay back 60% of the capital amount of car or R240 000, plus interest and finance charges. Once you have paid that off after three or four years, depending on the negotiated contract

period, you will still owe the remaining 40% or R160 000 which makes up the balloon payment.

Managing a balloon payment

Customers who choose to finance a vehicle with a balloon payment will have three options at the end of the initial contract period.

In order to settle the balloon payment and take over ownership of the vehicle they will need to pay that amount off in cash or refinance the remaining amount with a new loan agreement. Alternatively motorists can sell the car and use the funds from the sale to settle the balloon payment.

It is therefore a good idea to start saving from day one for the balloon payment to make the final payment more manageable.

Refinancing means taking out a new loan which is treated as a new loan agreement and subject to all the credit checks. The interest rate will be based on the customer’s risk profile at the time of refinancing.

Loan extension options are available which extends the term of the existing balloon loan and instead of a new loan, the original loan term is simply extended with a revised payment schedule to settle the balloon amount.

The advantages of a balloon payment

The advantages of a balloon payment include lower monthly instalments than when financing the full value of the car. This allows motorists to drive a car that they might not be able to afford right now, at a monthly rate that suits their pocket.

The disadvantages of a balloon payment

Financing a vehicle with a balloon payment option means that it takes longer before the vehicle is paid off and the car is actually yours. This can result in more expensive total financing costs or a cycle of excessive debt if not managed well.

The settlement amount, which is the total capital amount still owed, will be much more substantial should you decide to sell or trade in the vehicle before it is completely paid off.

Along with longer contract periods comes added interest and finance charges, meaning that you will pay much more for the car over the entire contract period than if you took a 100 percent loan over the traditional 3 or 4 year loan period.

Do your homework

While financing a car with a balloon payment offers advantages and disadvantages it is important for motorists to do their homework and calculate what the car will actually cost them over the entire financing period and if they are comfortable with those costs.

It is important to remember that you will still have to pay for the car at some point and initial savings could cost you in the long run.

Motus Select offers innovative tools that allow you to calculate how much a car will cost to finance with various permutations of different deposit sizes and balloon payment percentages. View the finance calculator here. In addition, the informative affordability calculator will allow motorists to determine what they can really afford.