Protect yourself from balloon payment woes

Navigating the complexities of vehicle financing can be daunting, especially when it comes to understanding loan structures like balloon payments. For a first-time buyer this can be even more overwhelming. While a balloon payment may seem like a convenient way to reduce monthly payments, it can lead to significant financial strain at the end of the loan term.

Imagine that you purchase the car of your dreams, only to be involved in an accident. Fortunately, no one is seriously hurt, but the damage to your car is severe enough for it to be written off. Despite having insured your car for its market value, you could still owe a substantial amount to the bank, however, if you add a balloon payment to the equation, the financial burden is even more detrimental. Not only do you have to consider how you’ll get around, but you’ll also need to think about how you’ll repay the outstanding balloon payment, for a car you no longer have.

There is coverage available to financially protect you in such situations. Whether your car is stolen or written off after an accident, top-up cover or credit shortfall insurance could alleviate your financial woes. “With the right knowledge, you can make informed decisions about opting for a balloon payment, or not opting for it, which can amount to up to 40% of the value of the car. It is important to ensure that you are aware of the financial implications of the decisions you make around purchasing your vehicle” – this is according to Atang Matebesi, CEO of Santam Client Solutions.

Shortfall cover car insurance is an optional add-on offered by most insurers or finance companies. It covers the gap between your car’s insured value and the amount owed to the bank. “This is crucial as vehicle financing typically involves high-interest charges over the loan period,” says Matebesi. For example, if your car is insured and its market value is R110,000 at the time of an accident, and the outstanding settlement value is R130,000, then the shortfall cover will pay the R20,000 difference between the market value and the outstanding settlement, including the balloon payment.

“Our assets are extremely important to us, so it is imperative to ensure that they are fully covered. Everyone deserves to enjoy driving their car knowing that they are fully protected in case any unforeseen event happens,” says Matebesi.