Whenever I ask this question to my customers, I am met with a look of confusion. Many people buy cars on residual yet they have no idea how they are going to pay the residual when it falls due.
Zazi* is one such person. Her car is about R280 000 with a balloon payment of R80 000 and the balance owing of just over R450 000. As I read her statement, this didn’t make sense to me. How could the price of her car be R280 000 yet she is owing over R450 000 on the car? When I spoke to her, this is the sad explanation I got. Zazi bought her first car over 4 years ago. It had a balloon payment. She had no idea how she was going to pay the balloon. After 3 years, she was sold the idea that the best way to deal with the impending balloon was to simply buy another car and roll the balance forward to the new car. So while she was still owing a lot of money on her first car, she traded the car in. After the trade-in, she was owing an even bigger balance on the new car. The balance owing on her first car was brought forward into the new car. I looked at her and shook my head. This is a BCom Finance graduate so she has no excuse for making such silly decisions about her money. In the end, I opened a tax-free investment account for her so that when the residual is due, she can use the funds accumulated to pay part off the residual.
In my opinion, buying a car on residual is reckless borrowing. If you cannot afford the car without the balloon, then you simply cannot afford it. You should be saving money to build up a deposit for your car and then use the deposit to lower the monthly instalments on your car. Rolling forward the residual and balance owing on your car to a new car is reckless. If you were to lose your job and have to sell the car, you would find yourself in a position where you still owe the bank for the car that has been sold.
If you find yourself in this position, you can contact me to open an investment account for you so that you can settle the balloon when it is due. If you are planning to buy a car, contact me to open an investment account so that you can put down a healthy deposit on your car.
*Zazi is not her real name