I received a phone call from one of my customers and he was phoning to tell me that he is buying a car by Christmas. Laughing, I said “so you want to shine at home this Christmas? ”Then we got serious. I asked him if he had saved for the deposit. I was disappointed when he said no. I followed up, are you going to use your bonus? He then reminded me that they received their bonuses in September and to my dismay, he wasn’t going to use his bonus either as he had already used it to pay off his debts.
I pushed through [I knew the answer already but I still asked him], so how are you going to buy a car if you don’t have a deposit? He blurted it out “ I am going to buy it on balloon, I don’t need a deposit” Sighing out loud I asked him “you know you are buying a car you can’t afford right?” He insisted that he could afford the car and I told him the following which I want everyone who wants to buy a car on balloon to understand;
When you buy a car on balloon, you are buying a car you cannot afford and here are the facts;
- Your monthly repayments are lower when you buy a car on balloon. This looks attractive to someone who wants to buy a car they cannot afford.
- NO deposit is required so buying a car on balloon is an excellent idea for someone who wants to buy a car without planning or preparing for it. In short, it encourages impulsive spending
- The balloon is actually the deposit that you should have put down at the beginning but because you do not have a deposit, a balloon payment is due at the end
- You do not know where you are going to get the money for the balloon payment and because your repayment is stretched to 6 years, you hope you will have the money for the balloon at the end of 6 years. If you do not have the money now, without the burden of monthly car repayments, how are you going to have the money in 6 years’ time?
- If you add up the monthly repayments when you buy a car by putting down a deposit and having NO balloon at the end and compare the total to when you buy a car on balloon, you will find that buying a car on balloon would result in the total cost of buying a car being higher
- Because you do not know how to pay for the balloon when it is due, you are likely to fall in the trap of trading in your car before the balloon is due. This has the impact of putting you even deeper into debt as you would roll forward the balance owing plus the balloon into the new car. So your new car might be R350 000 but you could owe R480 000 on it because you rolled forward the outstanding balance from your old car into this car. Then you need more insurance to cover the gap between the value of the car and the full balance owing. The bottom line is, you have become a slave to your car. If you ever have to sell your car, you would only fetch the market value and you would still owe a big amount on the car even if you sell it
South Africa is in a recession, many people are losing jobs as companies are downsizing and others are closing down. What would happen to you if you ever have to sell the car? How would you pay for the shortfall?
So if you want a new car by Christmas, think again. Ask the sales man to draw 2 quotes for you
1. A quote with no deposit and a balloon at the end
2. A quote with a deposit and no balloon at the end
In a short while, I will write about the best way to buy a car. I want you to buy a car you can afford and a car that will not cause you to have sleepless nights
For more details on how to buy a car, read Chapter 5 of my book From Debt to Riches – Steps to Financial Success. The title is; Is your car driving your destiny?
Do you want to save for a deposit for a car? Drop me an email on firstname.lastname@example.org
If you want a financial advisor, you can also drop me an email on email@example.com. If you are planning to buy a car, I suggest you contact me BEFORE you buy the car, NOT afterwards. If you have already bought a car you cannot afford, there isn’t much I can do to help. You have to sell it and figure out how to pay off the shortfall.