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Personal Finance editor Maya Fisher-French looks at some reader-received questions relating to their finances. She seeks out the best possible answers for our readers.
Is it a good thing to pay off your balloon payment before its due date if you are intending to keep the car? Then one continues paying the remaining debt of the car without residual?
CITY PRESS REPLIES:
What many people do not realise is that balloon payment attracts interest and you are paying that interest as part of your monthly instalment. If you settle the balloon payment first, then you can opt to either have a lower monthly instalment on the remaining debt or you can keep the instalment the same and pay the car off sooner.
The challenge is that not all financing houses allow you to settle the balloon payment before the principal debt.
If you make advance payments, they deduct that from the term loan amount first. The effect is that you pay the term loan off earlier and can then convert the balloon payment into a further loan if you do not have the funds available.
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Absa Vehicle Finance does allow you to pay off the balloon first and has introduced this into its banking app. This is an excellent way to settle your balloon payment while you are paying off your car finance so that when you come to the end of the finance term, you do not owe a lump sum.
The app shows your current outstanding balance plus the amount you have paid in advance – basically, the amount over and above your agreed repayment amount.
You can then select to transfer the advance by specifying that you want this additional payment to go towards your balloon payment.
If you do not have a balloon payment, you can opt to rather use the advance payment to lower your monthly instalment. At this stage, the app does not allow you to use your additional repayment to reduce the term of the loan, as this requires a change to the actual contract. This can only be done via the call centre.
It is worth noting that, even if you do not transfer the advanced amount towards the outstanding balance, you are still benefiting by not paying interest on the full loan amount.
For example, if your current balance shows as R363 000 and your advance amount is R20 000, you earn interest on the advance amount at the same interest rate you pay on the current balance. This means the advance amount interest offsets the interest paid on the R20 000 of your current balance.
On the app, the “estimated settlement value” includes the advance amount, which would then be R343 000.
Another way to pay your car finance off sooner is to set your debit order amount higher than the agreed instalment.
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Again, this cannot be done on the app and requires the customer to call in and ask for the debit order to be different from the instalment amount.
“It does require the customer to also keep an eye on the instalment amount when interest rates increase since it can exceed the debit order amount and the account might go into arrears,” says Faisal Mkhize, managing executive at Absa vehicle and asset finance.
“The benefit of keeping the instalment and debit order amount the same is that the debit order will always adjust to the correct instalment amount automatically when there are interest rate changes.
“Additional amounts can always be paid in via EFT or by setting up scheduled recurring EFT payments on the app.”
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