If you’re in the market for a car, you might have heard of or have been offered a balloon payment scheme. This is common, especially when it comes to purchasing your very first ride. Ideally, you want to pay as little as possible for downpayment and monthly installments. Fret not, financing your first big purchase doesn’t have to be exhausting or frustrating.
Before you decide on anything, here is a lowdown on balloon scheme financing, and why it might be a really good and wise option for first-time car buyers.
What is a Balloon Payment Scheme?
Let’s start here: What you need to pay for a downpayment depends on your car’s open market value (OMV), which is essentially the actual price of the car (excluding taxes). As for the remaining amount, you need a loan to finance your purchase.
Speaking of OMV, for cars that have an OMV of up to $20,000, the maximum loan amount you are allowed to have is 70% of the car’s purchase/valuation price. Additionally, for cars that have an OMV of more than $20,000, the maximum loan amount is 60% of the car’s purchase price.
Now, this is where the balloon scheme comes into play. The balloon payment scheme is made to offer lower monthly installments – but, how? The loan amount doesn’t include the Preferential Additional Registration Fee (PARF) rebate portion of your car, and thus, when divided, you get to pay lower monthly installments. Though, sorry to burst your bubble, the interest incurred is higher as opposed to typical car loans.
How does a Balloon Payment Scheme work?
To paint a better picture of how this balloon payment scheme works, in comparison with a conventional loan, here’s a simple table we’ve crafted:
In this example, let’s imagine that your car costs $100,000, with a $20,000 OMV and $10,000 PARF amount. The downpayment is $40,000, which leaves the remaining $60,000 as your principal loan amount.
As seen from the illustration above, you can see that the monthly installment for the balloon scheme is lower than that of a conventional car loan.
However, the PARF value that’s excluded in the loan amount for the balloon scheme will eventually be added back into the equation for the final monthly installment. In summary, the final installment you have to pay would be $10,983 ($983.3 + $10,000 *PARF value).
What are the benefits of the balloon scheme?
Apart from the obvious being the lower monthly installments, there are a couple of other advantages that are more beneficial for first-time car buyers.
1. Get a better/your dream car
Given that you pay lesser for the ongoing monthly installments, this is a good opportunity to finance a car that’s initially out of your league. If you’ve always wanted that dream ride, maybe this is your sign to attain a ‘higher-end’ car.
2. More resources (time and money)
Think of it this way: Every month, you get to save some money and buy yourself more time to either work harder or save more to pay off the final installment. This is usually an ideal plan for many first-time car buyers, as they might be in a phase of life where they are studying, just graduated, or figuring out their career path.
If you are someone who is very sure of their purchase and will stick through the entire tenure, then opting for the balloon finance scheme is definitely worth every time and cent. At the end of 10 years, provided you don’t have a change of heart and sell the car, you will get back the PARF value from the government to help pay off your final installment.
Whether this balloon scheme is something you should go for, it is ultimately your choice based on your financial plans and means. Don’t simply live for the moment and only see the short-term benefits; rather, it is always wiser to exercise good financial judgment and work within your budget.
It’s also insightful to get an expert’s advice to help you make better and more informed choices. If you need advice on which financing scheme you should take up, we are here to help. Book an appointment today at https://sgmotoringhub.com/ or drop us a message via our Facebook page.
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