What’s a residual?

A residual value is a term that is used in lease agreements and it makes reference to the value a fixed asset has when its lease term has finished. For example, if you take a lease for a car for 5 years, the residual value will be the value it still has after those 5 years have passed.

This residual value is established by the financial institution that offers the loan or the lease. The value is determined at the start of the lending process and it is established according to guidelines set by the Australian Taxation Office. These guidelines are established using forecasts and models that estimate the assets depreciating value over time.

Along with the interest rate, fees and the relevant taxes, the residual value is also crucial when calculating your lease repayments. The residual value will reduce your monthly instalments which are also known as rentals.

What’s a balloon payment?

The concept of a balloon payment is very similar to the residual value, in the sense that it represents the amount of funds that remain at the end of a loan term. The balloon payment is payable as one final payment once the loan term has expired.

Unlike the residual value, the balloon payment is not based upon the ATO forecasts that would indicate the depreciating value of the vehicle in time. This gives the buyer more flexibility to choose the size of the balloon payment, providing it meets the lenders balloon payment policies. Balloon payments are not mandatory on car loans and the option of no balloon can sometimes provide the best outcome to clients.

What are the benefits?

The greatest benefit of a balloon is the fact that it reduces the monthly instalment. If servicing is tight, the lender (or broker) can suggest a balloon payment in order to bring the loan repayments down. Borrowers should be aware that the balloon payment will be due immediately upon the expiry of the loan term. This being said, borrowers have a variety of options available to them at this point; refinancing, cash payment or trading the vehicle in.

If the vehicle for business purposes and is financed using a chattel mortgage or hire purchase, having a balloon could increase the amount of interest that is payable over the term of the car loan (provided you refinance the balloon). As a result, you will be paying less principal (which is not deductible) with every repayment you make by having the balloon offset at the end of the transaction.

Get in touch today.

If you’re in the market for a consumer car loan, lease or chattel mortgage, give us a call today on 1300 882 851 or leave an enquiry online.