IN YOUR CORNER
Consumer beware: balloon deals are on the increase
But that doesn't mean you will be able to spot one on your contract - so take care when signing
“But they signed the contract. It’s binding.”
That’s invariably what somebody in a smart, air-conditioned corporate office – and with the benefit of a fine education and generations of experience of entering into contracts – says when a consumer claims not to have known about a tricky clause in a contract.
Buyer beware, read the contract, and all that. Yes, yes, I’ve been saying that, over and over, for two decades myself.
But how easy are the contracts to understand – who were they written by and for? The consumers who emerged from the not-so-good side of SA’s social engineering system? I think not.The companies’ mission statements speak of “total commitment to customer satisfaction”, “ensuring customers are treated fairly” and the like, but their measure of fairness often excludes the realities of their target market.
Is it fair, for example, to expect a 20-something first-time car buyer, the product of a family that has never owned a car, to spot the fact that after they’ve made 71 monthly payments of say, R4,000 there is one final payment of about R80,000, when that amount is in tiny print with no “eye-catching” mechanisms such as bolding, italics or boxing?
I’ve seen many of those contracts – the words “balloon payment” do not appear, and that final massive amount sits there, small and quiet, easy for the eye to gloss over.Given how many people have complained that their salesman and “finance person” didn’t mention it, and they unwittingly signed a “balloon” deal, the design of both the motor dealership’s invoice and the financing bank’s contract should make that “balloon” float off the page and dance in front of the buyer’s eyes.It may not be illegal to make no attempt to ensure consumers don’t miss it, but in my view it’s unconscionable – especially given that, as car prices soar and our incomes don’t, balloon deals are on the increase.
This is how it works: Take the advertised price the car, add all the extras (most of which are not needed and most certainly overpriced), add interest over the full term, then, in order to get to an affordable monthly instalment, carve out that “final payment”, then divide what remains by 60 or 72 months.
In June I wrote about Dudu Koloi’s balloon payment disaster – she’d assumed that in November she would have totally paid off her Kia Rio, but had discovered she had a balloon payment of R70,000.Conceding that their usual disclosure policies around financing were not followed in Koloi’s case, Nedbank’s Motor Finance Corporation has since lowered the interest rate on her agreement and extended the term by a year in order to absorb that balloon payment, meaning she’ll pay her current instalment for an extra year, and then owe nothing further. But since Koloi’s story was published, several others have emailed me to say the same thing happened to them: they unwittingly signed a balloon deal.
“No-one told me anything about a balloon amount when we were busy with negotiations and signing of the documents for my car in March this year,” said Valencia Mawela. “It’s a 2014 Hyundai Grand i10 and it was only after they sent me the contract two weeks later that I realised there is a balloon. When I asked the sales woman about it, she said she will speak to her boss but she never got back to me.”
A screen grab of her WhatsApp exchange with the saleswoman reveals the latter’s dismissive attitude.In the case of someone I shall call Thipi, the “surprise” balloon payment is a massive R170,000, due in November, after five years of paying R5,800 a month.
She traded in her Golf 6 on a 2013 BMW 320i and says she specifically told the salesman she didn’t want a “residual” (another term for a balloon payment).
“He said that won’t be a problem because I was trading in my car.”
Even when I highlighted the payment details on Thipi’s contract for her, she battled to pinpoint where that R170,000 “final” payment was disclosed.
A BMW Financial Services spokeman said “Thipi” had “signed and initialled the documents in all the locations required by the National Credit Act”.
“We remain in touch with her to work through options on the financing of the balloon repayment.”I asked the question I ask of all motor financiers: "Given that there is never any proof of what the salespeople disclose or fail to disclose to prospective car buyers, wouldn’t it be appropriate to make sure that that very large final payment is virtually impossible to miss?”
He pointed out that the final (balloon) payment is also included in all statements of account sent to customers, but undertook to raise the issue of the contract payment design.“BMW Financial Services constantly monitors customers’ experiences and takes feedback seriously.”
I take consumer experiences seriously too, and they are telling me that the industry needs to do a lot more to ensure that no one signs a car deal not realising that the finance person only arrived at that monthly instalment amount by slicing off a big chunk of the financed amount and “parking” it for five or six years.