Balloon Leases And How They Go Wrong

The Volvo V70 was a nice car, so nice that I had two of them, and in that way I have of needing to learn by experience and not just learning by reading, I discovered the first rule of buying a new car – you will lose shitloads of money.

The first V70 I bought was actually second hand and it wasn’t the V70 model it was the 850, the one that preceded the V70, this is as complicated as this post gets, I am no Jeremy Clarkson and I hold the proud boast of never having lifted the bonnet of a car for around ten years, not even to put water in the windscreen washers for I have no interest in what makes a car go, only that it does go.

Its was a nice car was the 850, I should have kept it, with hindsight I now know that my mistake was to be tempted by the V70 that replaced it, if I’d never gone back to the Volvo showroom I never would have been tempted but I did, and I was, and it was all because the V70 in the showroom had a picnic fridge in the back.

What a literally cool idea I thought, you can have a properly cooled cool box in the back of your car, what a wonderful thing to own and despite the fact that I’d never felt the need to have a refrigerator in the back of any other car that I’d owned I felt that I needed this one, so I signed a lease for a brand new V70, with a fridge in the back.

It was the most I’d ever paid for a car, then and now, about £24,000, and worse still I signed a balloon lease.

For those not in the know a balloon lease in the 1990’s was the way to go when purchasing a car, the way to go for financial company’s that is, it was not the way to go for consumers but then we knew nothing of the devious ways of financiers in those days, we thought they were doing us a favour.

In a balloon lease you are initially under the impression that you are purchasing the car, you are not, you are renting it for a while and then after you have made the last monthly payment (probably three years down the line after you’ve actually forgotten what you signed for) you have a lump sum payment to make in order to own the car, or alternatively give the car back to the lease company, or alternatively sell it privately and use that money to pay off the balloon payment.

Sounds like an absolutely fine deal really and you can still sign balloon leases these days but the difference is that now the finance company’s are usually careful to ensure that the balloon payment equates roughly to what the car will be worth in three years time so that you don’t feel ripped off and they don’t get lumbered with a car that is not worth what they thought it was.

In the 1990s the balloon payment was simply adjusted ever upwards to make the monthly payments smaller, in my case the balloon payment on the £24000 Volvo V70 was £9000 over a three year contract with payments of around £500 a month, no, I can’t imagine why I signed the deal either, but I did, its what happens when you have a profitable business and you don’t have to think too hard about where the money comes from – thats rule number two in life, never assume the gravy train will run for ever.

It would probably have still been a good deal anyway if it wasn’t for the unknown fact at the time that Volvo UK was royally ripping off the British public by way of over-pricing their products to the UK market, they weren’t the only European car manufacturer who hoisted their car prices by 15 to 20% for the UK market and several thriving businesses existed in the UK where people would travel to different European countries to source brand new right hand drive cars and drive them all the way back here and save several thousand pounds in the process – that was before various consumer groups got in on the act and pressure built upon the UK importers to stop the rip-off.

Volvo Uk came clean, “Yes we’ve been ripping you off for ages” they said, and just three months after I’d paid £24000 for my V70 they slashed their retail prices by 15%, “There” they said, “We’re not ripping you off now” quietly ignoring the fact that second hand prices for over-priced Volvos had suddenly dropped through the floor.

I checked the price of my £24000 car, just six months after I had signed for it – £17000 I could buy one for now, I owed more on my car now than a brand new one would cost me.

And the following year they slashed their retail prices again, “We’re definitely not ripping you off now” they said, “Oh, and sorry we ripped you off before, what are we like eh ?”

So two years into my lease deal I decided to check the second hand value of my car and compare it to the balloon payment that was coming up in just twelve short months …

£12000 it was now worth and a year to run on the contract still, the nice moon-faced young man at the Volvo dealer estimated that my car would be worth about £6000 when I came to trade it in next year, that would be the time that I’d have to hand over £9000 for a £6000 car that I’d actually paid around £27000 for, the value of that Volvo V70 fell lower than a Fleet Street newspaper editors reputation, and thats pretty low, the only thing that kept its value was the fridge in the back of the car and I used that once when we went to Doncaster races one weekend.

It did actually cost me £3000 to get rid of that car, when I came to sell it I had to put £3000 of my own money into the deal to pay off the finance and as you may guess, I don’t like Volvo any more and I don’t like lease deals any more and I certainly don’t like the finance industry any more, not at all…


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