How your instalment is worked out
Loans are repaid in equal monthly instalments that cover interest and part of the amount borrowed. Fees and a balloon payment change what you pay each month and in total.
- Amount financed. For a personal loan, the amount you borrow, plus the initiation fee if it is added to the loan. For car finance, the vehicle price minus your deposit and trade-in.
- Balloon payment. A lump sum, set as a percentage of the vehicle price, that you pay at the end of the term. It lowers your monthly instalment, but you still pay interest on it throughout the term.
- Monthly instalment. The standard loan formula spreads the amount financed, less the present value of any balloon, over the term at the monthly interest rate. The monthly service fee is added on top.
- Total cost. All the instalments, plus the balloon, plus any fees paid up front.
Example: a R400 000 car
Pieter buys a car for R400 000, pays a R40 000 deposit and finances R360 000 over 72 months at 12%.
With no balloon, his instalment is R7 038 a month and he pays about R146 741 in interest over the six years.
With a 30% balloon of R120 000, his instalment drops to R5 892 a month. He then owes R120 000 at the end of the term, and his total interest rises to about R184 227, because he carries a larger balance for longer. Service fees are not included in these figures.
A personal loan of R50 000 over 36 months at 20% costs R1 858 a month, with about R16 894 in interest.
Common questions
Is a balloon payment a good idea?
It makes the monthly instalment more affordable, but it costs more in interest and leaves you with a large payment at the end. Many people refinance the balloon or trade the car in, which can mean starting a new loan while the car is worth less than it was.
Why is my quote higher than the calculator?
Lenders add a monthly service fee, an initiation fee and often credit life insurance. Enter the fees from your quote to compare like with like.
What interest rate will I get?
It depends on your credit record and income. The National Credit Act caps the maximum interest rates lenders may charge, but your actual rate is set by the lender after a credit check.