Should You Buy A Car With A Residual Or Balloon Payment At The End Of Your Finance Term?
What is a residual value?
A residual value is when the bank takes a part of the cost of the vehicle off the purchase price and then finances the balance. You will then have to pay the difference with your last payment at the end of your finance term.
What Are The Benefits Or Not?
When you purchase a motor vehicle with a residual value at the end it brings down your monthly premium. This is good if you cannot afford the higher premium. You should, when you can afford, make extra payments towards your loan to reduce this res value. Before you know it your term is up and you must make one large payment that at that time you do not have. The saving is normally not that great. You might save 25% on your monthly payment, but have to pay a 40% residual value at the end.
The 40% residual value attracts interest over the period of your lease agreement.
Let the bank give you a quote on both residual or not. If you could rather give a bigger deposit it would help a lot.
I purchased a Ford Fiesta 1.4 for R110 000 and financed R100 000 of it. After paying R2000 per month for 54 months I still had to pay R44500 residual value after paying R108 000. I did not miss one payment or pay any one late, but when I wanted the bank to refinance they refused and I did not have this money lying around. Fortunately I had a client with a long standing relationship that was willing to lend me the money.
You can refinance the outstanding amount and just keep on paying it off if your credit allows it and the loan giver is willing to give you the loan at that stage. You can borrow the money from someone else and settle your debt with the bank.
The problem with refinance is if you cannot come up with the money you have to return the vehicle to the bank and lose all your payments you made towards it. Further the bank will send an assessor to evaluate the vehicle and any faults found would be for your pocket.
Advice
Give a bigger deposit.
Extend the loan term.
Negotiate a better price with the salesman.
Do not take an air conditioner. This would have saved me R10 000 and I seldom use it because of petrol price and because it is a small car it reduces the power and make the car sluggish.
The colour of the car pushes the price up. Any metallic colour costs extra
Buy a cheaper car.