Contrary to how it sounds, balloon payments have got nothing to do with buying inflatable novelties. Instead, it has everything to do with asset and car finance loans. Our expert team have put their heads together to run through everything you need to know about it.
What is a Balloon OR Residual payment?
A Balloon Payment is a lump sum that is owed to the finance company at the end of the loan term. Generally, this is the last payment after all regular payments are made. This allows you to pay a portion of the principal over the term of the loan, assisting you in reducing the monthly repayments by agreeing to pay a lump sum at the end of the term.
How is the Balloon OR Residual payment determined?
The ATO set a guideline for the Balloon Payment based on the length of the loan term. This is based on a sliding scale, and for a 5 year loan term this works out to be a minimum of 28.13%. See the ATO guidelines for further details.
What does it mean to you?
You will pay lower repayments throughout the term of the loan compared to a loan that has no balloon payment. This in turn can provide benefits such as assisting with cash flow and aligning the loans principal repayment with the value of the vehicle over time.
For example, lets say you borrowed $40,000 for a car and chose to have a 25% balloon ($10,000). At the end of the loan term, the value of your car is expected to be $10,000. You could sell the car and pay off the balloon. This means you won’t be paying any interest on the $10,000 during the term of the loan.
What happens at the end of the term?
- Pay out the balloon – You can pay the amount owing on the car and own the car outright
- Refinance the balloon – Although not recommended (as that increases your cost of ownership), you can refinance the balloon payment
- Sell the car – A good option if your car is worth what is owed on it
- Upgrade to a new car – This is generally the most common outcome on car loans with balloon payments. When you trade the car in, and if the dealer is happy to pay out the amount owing on the car, then you can upgrade to a new car with no debt owing from your previous car.
Things to be mindful of at the end of your loan term
- If you decide to refinance your balloon repayment, you may not be able to refinance the balloon payment amount if your circumstances have changed from the start of the loan. For example, you have changed jobs, your number of dependents has increased, you’ve changed your residential status, your credit history has changed etc.
- If your car is not worth the amount owed on it, you will have to pay the difference between the cars market value at the time, and the amount owed on it.
Make sure that you have a plan in mind at the start of your loan. Whatever the situation, you are still liable for the lump sum payment at the end of the term.
Need assistance with finance?
We understand that everyone’s situation is different, the team at FinanceBeagle are ready to help answer all your questions and help you with all your finance requirements. We are confident that we will sniff out a loan that suits your specific needs.
Get in contact with the FinanceBeagle team today on 1300 225 525 for an obligation free chat about your finance needs.
