What is balloon scheme financing?
Your dealer may also offer you what is known as balloon scheme financing, touting lower monthly instalments as the main benefit.
Yes, it is true that balloon scheme financing can offer lower payments each month, but the advantage is only for the short term. This is because of how a balloon payment scheme works.
In a balloon scheme motor loan, the vehicle’s PARF rebate value is initially deducted from the loan. The interest on the loan is calculated based on the car’s price after this deduction – this results in a lower instalment amount.
Until the final instalment, that is.
The PARF value that was deducted from the loan (and for which no interest was charged) is payable on the last instalment, which will make for a pretty mind-blowing final bill.
As such, a balloon payment scheme requires you to be vigilant about your finances, as you will need to either consistently sock away money for the PARF value, or find some way to come up with several tens of thousands of dollars as the final instalment approaches. As if owning a car isn’t already stressful enough!
If you’re offered such a scheme, be sure to weigh carefully whether you will be able to keep to the terms of the loan. The lower instalment payments may not be worth the hassle of having to come up with a large sum of money at the end.
Bank loan or dealer in-house loan – Which should you choose?
As a general rule, you should always go for the loan with the lowest interest rate, as this will give you maximum savings.
However, if the lowest rate loan you can find is being offered by an organisation you are not comfortable doing business with, then it may be worthwhile getting your car loan from an entity you trust, even if you end up with a slightly higher interest rate.
After all, a car loan is a major financial commitment, and having peace of mind is important.
That in-house car loans from dealers do not count towards your TDSR may be enticing to some, but this can also be a double-edged sword.
Those who are not careful can find themselves overleveraged, struggling under the weight of too much debt.
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