Despite over three quarters of cars being sold with some form of finance attached, research shows that few people fully understand what they are signing up to. At FairSquare, we hope to help you get a better understanding of the details, benefits and risks of all car finance products available to you. We also recommend you do as much research as you can before you choose a finance product.
Selecting the right way to pay for your car is just as important as choosing the car itself.
It makes sense to calculate what you can really afford each month on a car, not forgetting you need to factor in all the running costs such as insurance, car tax and maintenance.
Affordability is the key criteria all lenders use to evaluate if they should make you a finance offer. You may well be asked by a lender to provide proof of income and outgoings to secure your car finance, depending on your credit rating. Most people – and the car industry in general – tend to focus almost entirely on the monthly payment. However, you should pay much more attention to the full implications of entering into a finance agreement, considering a complete breakdown of all the potential charges during and at the end of the agreement, taking time to consider the suitability of that product to your needs.
Understanding Balloon Payment Hire Purchase (HP)
- Balloon Payment Hire Purchase is a form of credit agreement to finance your vehicle where you do not own the car until you have paid the final payment to include the option to purchase fee
- The difference to a Full payout HP agreement is that instead of all the payments being the same amount, there is one larger balloon payment at the end of the contract
- You get ownership of the car at the end of the agreement, subject to the final lump sum payment being paid along with your option to purchase fee
- The monthly repayments are lower than Full Payment HP because there is a final lump sum payment to settle at the end of the agreement so you are only paying back a proportion of the purchase cost in your regular monthly payments
- It’s important to remember the final lump sum (the balloon payment) will come out as a standard direct debit from your bank account at the end of the agreement term
- Once you have paid the balance in the full, the car is yours to either keep, sell or part exchange at will
How Balloon Payment HP works
You usually pay a deposit and then pay off the remaining amount of the purchase price in fixed monthly installments. Most contracts are set up over either 36, 48 or 60 months.
A Balloon Payment HP agreement allows you to purchase a car under the same terms as a Full Payment HP agreement, but with lower monthly repayments. The interest rate is fixed, so you’ll know exactly how much you will repay throughout the term of the agreement.
Your finance quotation should always include the Balloon payment due at the end of the agreement.
Though your monthly repayments are lower, with this type of finance you are still paying the full value of the car. However, a percentage of the amount borrowed is moved to the end of the agreement, this is called a Balloon.
At the end of the monthly payment period you have two options:
- You simply pay the Balloon payment and the car is yours
- Use your car to part exchange towards another car (subject to any finance payments outstanding being settled in full)
You get full use of the car throughout the agreed period as if you owned it (including you being the registered keeper on the V5 registration document) but the lender remains the actual owner until the end of the agreement when you pay your balloon payment and exercise your option to purchase and pay the fee with your final payment.
What can change your monthly repayment?
- Most people taking up a HP agreement will put down a form of deposit or part exchange. Very few lenders will provide contracts with zero deposit, so you are more likely to get more competitive financial offers if you have a deposit to put down.
- However, you should be aware that the lower you set your deposit, the greater the risk that you might find yourself in negative equity (i.e. the car is worth less than what is owed on your credit) should you decide to repay your credit early or wish to change your car before the end of the agreement.
Balloon Payment HP Key Facts:
- Can be used to finance both new and used cars
- Offers flexible deposit options, although some funders have minimum deposit requirements particularly where you might be responding to a certain deal such as lower interest (APR)
- Spreads cost of car in fixed equal monthly installments until the final balloon payment.
- You get ownership of the car at the end of the agreement subject to payment of your final balloon payment and option to purchase fee
- You need to maintain suitable insurance cover throughout the term of the agreement
- Your car is at risk of repossession if you do not maintain your monthly payments or breach any other terms of the agreement
- Unlike PCP you are not limited to an annual mileage or other conditions (such as wear and tear). However, as the lender owns the car until you pay the balance in full and exercise your option to purchase, you are required to keep the vehicle in good repair and condition as well as properly maintained and serviced and pay the necessary costs to do so
What happens if my circumstances change?
If your circumstances change, we recommend you contact your lender immediately (keep records of all correspondence) and talk to them about the options available to you. This may involve restructuring your agreement in some way, to help you with the repayment of your debt. We can assist you with lender correspondence, should your circumstances change.
If you wish to settle your agreement early, you can do so by contacting the lender and pay the full outstanding balance, less a discount for early settlement providing you have maintained your monthly repayments throughout the life of your agreement.
Your right to terminate
You have the right to end your finance agreement. You can do so at any time and for any reason. It might be that you decide to end your agreement in the event that you are unable to make the monthly payments. In order to do so however, you should write to the finance company that you make your payments to. They will then be entitled to 50% (half) of the total amount payable, which will be shown on your agreement AND to the return of the goods. If you have already paid at least this amount plus any overdue payment and have taken reasonable care of the Goods, you will not have to pay any more. You will not receive any refund of any payments you have made up to or beyond that point. This is known as Voluntary Termination (VT) and if you have not fully repaid the lender under your finance agreement, this could be recorded with the credit reference agencies and may have an effect on your future borrowing capability.
Your repossession rights
If you are unable to make the monthly repayments and you’ve paid less than a third of the total amount of the agreement, the lender is able to take the car back without getting a court. The agreement will show the amount that makes up a third within the body of the agreement. In Scotland however, the lender may need to get a court order at any time.
However, if you are unable to make the monthly repayments and you’ve paid a third or more of the total amount of the agreement, then the lender is legally required to obtain a court issued order to reclaim the car at the point when your credit defaults.
In both cases, if the lender is unable to sell the car and recover the remaining value of the credit then you will be liable to repay any remaining balance on the credit as well as any costs incurred.
The lender will also report your default to a credit reference agency. Your default will be recorded on your credit file and can be viewed by other lenders and agency users who search your credit file. This may make it difficult for you and other members of your household to obtain credit in the future.