Balloon Payments

PFP Advisor

PFP Advisor

There are many ways to have a financial car crash. One of the best is to actually go and buy a car. A couple of years ago, we bought a second hand motor from a local dealership. Before signing on the bottom line, we had to choose our financing preference. We’d quite a few options, from paying cash (ouch!), to borrowing through extending our mortgage, to taking on a bank loan, or some sort of combination of these. There was also the option of taking the dealership’s Personal Finance Plan. Somehow, at the time, the latter seemed the most attractive offer for us, despite me knowing in my heart that I should bite the bullet and simply write a cheque. If only we could practice what we preach.

Nevertheless, it was the Personal Finance Plan we went for, paying a small deposit and relatively painless monthly contributions. The main stipulation that we had to watch was that we had to stay within an agreed annual mileage. The way these things work, providing you maintain payments and don’t exceed the mileage you commit to, the dealership “guarantees” to buy back your car in three years for a stated sum, given to you when you sign up. How can you lose? A very short summary: I paid a £1,000 deposit, signed up to pay 42 months Direct Debit at £230 a month and would have a final “balloon payment” of £4,700 at the end to purchase the car outright. Or, at that point, I could hand the car back, buy a new one, and enter into a new Personal Finance agreement.

Imagine my surprise, then, when last week I received a nice letter from the garage telling me our credit agreement was up and offering, as agreed, to “buy” our car back from us at the stated price they committed to. You’ve heard of a wake up call? I kind of remembered the detail of the agreement….but I kind of forgot that I’d have to hand the car back when the time came in order to pay the money I still owed on the Personal Finance Plan! Yes, they “buy the car back” from you, and take the proceeds to pay off the debt you still owe them. Great, I have cleared the car loan. Not so great, I now have no car.

This final payment is nicely termed the “balloon payment”. What they don’t tell you is that the chances are you are the balloon in the equation. I admit it, I had completely forgotten that despite paying a decent deposit, despite staying within our mileage agreement and despite paying our direct debit every month without fail, I would still owe the garage what now looked like a shitload of cash three and a half years later! Either that, or they’d take the car off me to cover it. How had I deluded myself?

Well, there was another party complicit in the delusion and they were now asking me to come in to discuss “upgrading” to a newer model. Oh how seductive it sounds. I hand the old car back to them. This can now both pay off the remaining debt and possibly act as part of the “deposit” on the next Personal Finance Plan (because the car’s resale value is well above the £4,700 owed, giving some negotiation wriggle room). I then don’t have to worry about writing a cheque to them for £4,700. Note the psychology here: my outstanding debt of £4,700 has now morphed, somehow, into a “deposit for a new car”. We can now choose our next car, sign up a new direct debit and drive it straight off the forecourt into a joyful motoring future.

Some key points here, all the same. The old car has now become part of the next deposit. I still have to stump up some additional cash to add to that deposit though, maybe £2,000 this time, to secure the newer motor – but hey, that’s a lot better than paying them the £4,700 I owe to keep my current (much older) model, isn’t it? It’s “double bubble”! My old car not only pays off the cash I owe, it also contributes toward a new one. How good is that?!

Secondly, the revised Direct Debit will be about £30 a month ahead of the current one, taking it from £230 a month to £260. In the scheme of things, that isn’t too bad, is it? I could cut £30 off the monthly grocery bill without breaking sweat.

Finally – although let’s not focus on this too much as it’s way in the future – at the end of this new agreement, I’ll owe the garage about £6,000 as a balloon payment on my “new” car. Or not. Because I can just repeat this cycle again! All I’ll have to do at that point  is stump another new deposit (£2,500?), a new Direct Debit (maybe up to £280 a month) and I can have yet another new car! Oh brave new finance world that has such deals within it!

Right now, I am fuming at myself for being a schmuk. Of course, I should – and could – have paid cash. I fell for the easy, short term, pain free, option that only comes home to roost way in the future. Unfortunately, “the future” has turned out to be “today”. Now I have to face up to my previous idiocy, pay off the debt, be stuck with my old car and lick my wounds.

Or I can sign up to a new Personal Finance Plan and have a new motor.

Don’t bet that I won’t!

22 thoughts on “Balloon Payments

  1. Hi Jim

    Sorry to hear that you got ‘caught out’ – easy to do and something that’s happened to me during my dark days in debt.

    I’ve recently just finished the PFP for my current car. I bought it with a big deposit (£3k) so that I only had small monthly payments of £145. I made a note of the date of my final payment and kept track of the annual statements so that I knew how close I was getting to the end of the agreement. The balloon payment (also £3k) I had sitting in my cash ISA, since my intention had always been to buy the car. So the end of the agreement came and went painlessly, all sorted and I have extra cash to invest each month.

    I was very pleased with myself, as in the past, on more than one occasion, I’ve whacked the balloon onto a credit card – so stupid but that’s what I did back then!

    I intend to keep my car for as long as economicially possible. Would I purchase my next car with cash or via another PFP? I’m undecided!

    New or used? I’m a new car kind of gal myself, whatever other PF bloggers say.

    Anyway, hope all goes well with whichever decision you make.

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      • Yes, that would work, as long as you remembered to pay it all off before the 0% offer ended…or transferred it to another 0% card!

        Only when I did it, I had no plan on how to pay once my 0% ran out….ouch!

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  2. Jim,

    I fell for exactly the same thing a few years ago. I was in sales and as part of my package was given generous car allowance. Rather than continue to run my current car and pocket a couple of extra hundred quid each month 21 year old me decided that I needed a brand new “executive” car to complete the successful salesman look.

    I ended up getting a vehicle that I would have never dreamed about buying as new from a garage in cash but somehow, because the monthly payments were affordable, I was convinced into thinking that one of these cars was within my means. The only reason I could afford it was because I was only ever paying for 2/3rds of the car via the finance so no wonder the monthly payments appeared “cheap”.

    I ended up selling it to clear the outstanding balance and am now back in a much cheaper, reliable second hand vehicle. I wouldn’t go back to the PFP, or PCP as it was called when I took it out. Like you say, the garages hope is that you end up in a never ending merry-go-round of financed cars. They make a decent buck in finance, get commission from the manufacturers and then get a well looked after 2nd hand car that they can re-sell a few years later for another big profit.

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    • I’d company cars my whole career. Never had to worry about car finance, so walked into the suckers deal. “Fail to prepare, prepare to fail”, as all good salespeople know!

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  3. Interesting blog. Car finance is a racket and to be avoided at all costs unless you really NEED a car to keep up work appearances (e.g. you are in high-end sales, are a business owner who needs to impress clients etc.).

    Cars are miles better than they were; most cars lose around 50% of their value after 3 years; it’s best to buy them at that stage, ideally for cash or low-cost loan which you pay off within three years, and keep them for 3-10 years. As long as you don’t skimp on maintenance (regular oil changes etc.), they should last fine unless you do monster miles.

    I have heard of madcap scheme whereby people add to the mortgage for cars: insane, the car will long be in the scrapyard and you are still paying for it.

    Albert

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  4. Jim
    A really great look at how people forget to read and understand all the conditions of the loans and face such shocks in the end. It is really important to prepare first and for any plan offered by dealership one should not agree on the first sitting. Rather little self control would work here because you should give yourself time to not only read all the fine prints but also prepare some questions on personal plans before agreeing on any financing with car dealership.

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  5. I’ve never heard of a PFP before, but I’m sure we have something similar in America. Tons of people “trade in” their new car after three years and roll that into a new one. Just the fact that you’re absorbing the three biggest years of depreciation is pretty skin-crawling to me. I bought my car new with a loan in 2005. I went to the showroom knowing the exact model I wanted and how I would pay for it. I paid it off in 2008 and I’m still driving it today.

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  6. If I had to buy a more expensive car, I’d probably do the 0% credit card route, maybe with some kind of deposit, then keep rolling the 0% deals/balance transfers/nectar points/airmiles as long as possible until it was paid off.

    For me, I just always look at how much that money is earning over the years by not buying the car upfront, similar to not paying off the mortgage now when that money can be used for investing and earn more over the long term than what it’s costing in interest.

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  7. The last time I entered the ring against a sharp-suited sociopath salesperson was a few months ago accompanying my parents who are incapable of fending off barely disguised bullying – to ensure they didn’t get diddled. Interestingly, we were told that over 90% of buyers these days were going for those monthly payment schemes that stretch reassuringly to the horizon so that the regular amounts can look so unintimidating. A couple of things then made immediate sense – why I see so many youngsters who look like they just started work driving a brand new, cute, hip fiat 500 …..& why the UK has torn off on a buying spree of new vehicles over the last few years of very fragile economic times vs other countries.

    The occasion before that, I accompanied my wife so it would be a ratio of 2 brains against one vs the dealer in the showroom – at the showdown – that’s the minimum you need to give you a fighting chance. He expertly drew a plan over a lot of paper on the desk in front of us detailing this amazing new offer – that sounds exactly like what you said. When he was done, I told him quite honestly that although I had little experience in finance, it sounded a hell of a lot like the principle behind endowment mortgages -which were getting slammed heavily in the media at that time.

    If I wasn’t sure before, his expression after that told me all I needed to know, the proverbial bulldog licking piss off a thistle 🙂 …..so we said ”No thanks, we’ll just take a second-hand car & pay upfront” Today’s version’s just the latest incarnation of hire purchase; every time that fact becomes universally understood, they simply re-brand it by launching a new sexy product that’s better ‘n eva before.

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  8. That is a rum way to buy a car! I learned after the first loan for a car in my twenties – start saving for the next one as soon as you buy a car. Worked for me each time since.

    Mind you, I don’t think I could ever bring myself to buy a new car. Not because I couldn’t afford it, but I couldn’t stand the sound of the loud bang as you drive off the forecourt which is a third of the value of it falling off. I just couldn’t sign the cheque knowing that was going to happen.

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  9. It’s amazingly devious by the financing companies.

    Mrs Z bought a car a while back and it was on 0% finance.

    Us: can you give us a discount for buying right now.

    Them: no

    Us: but it’s win win. Cheaper for us and for you, present value and all that.

    Them: no. Can’t do it.

    Us: ok. I guess we’ll invest the money for now then.

    The final payment is next year. Looking forward to the offers of trading the car in for a new one and a new plan. Always fun reading 🙂

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  10. I’ve never heard of this kind of deal before, and to be fair, I’ve never been subjected to a hard sell by car dealers either. I just say I am going to pay cash, and I’m not interested in hearing about finance, thanks. To be honest, I kinda thought that buying second hand cars in cash was just a sensible way of avoiding being ripped off, given the massive depreciation in the first few years….I guess I’ll just never know the joy of choosing the colour of my car 😉

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  11. I’ve never heard of this finance option either but then I’ve never even crossed the theshold of a new car dealership in my adult life. I think I’d like to keep it that way from the reports from the other side!

    I had a few experiences with cars in my younger days which ate a large hole into my wallet which just put me off for life spending anything more than was the bare minimum to get from A to B. I appreciate the look, drive, and gadgets of newer and nicer cars my friends have, but there is no way I’d ever pay for that. Just not worth it IMO!

    Cheers and good luck if you go back into battle 🙂

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  12. Are you kidding? I have only ever bought one new car (about 10 years ago and it has just died). The worst part of the process was choosing the colour. It was a Renault that came in black, blue, red, a vile yellow and about 15 different shades of grey. We couldn’t decide so eventually I pointed at a (grey) car in the showroom and said ” that one”.
    As best I remember I paid part in cash and the rest on a 5 year personal loan

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