Car loan balloon payments and Residual Values explained
One of the most important decisions you’re faced with when selecting a car loan is whether you wish to have a Residual Value or “Balloon Payment” on the loan, and, if so, how large you want it to be.
Having a residual value/Balloon payment will affect the amount of your regular monthly repayments, as well as how much you owe at the end of the loan period. These are also known as RV, Residual Payment, or Balloon.
Residual Value/Balloon Payment
At the end of a loan, when all repayments have been made, the lump sum still owed to the financier is called a residual value, or Balloon payment. These allow you as a borrower to repay part of the initial loan over the term, which will reduce the monthly repayments but mean you will owe the financier a lump sum at the end of your loan term. This value may be represented as an absolute dollar amount, or a percentage of the borrowed amount.
For example: A new car buyer borrows $40,000 over 5 years and elects to have a $10,000 (25%) Residual Value/Balloon Payment on their loan. Monthly repayments will be lower than if they elected not to have a residual/balloon payment, but will owe the financier a lump sum of $10,000 at the conclusion of the five year loan.
With the exception of leases, having a Residual/Balloon Payment on a car loan is optional.
Benefits of Balloon Payments
The main benefit of initiating a residual value/balloon payment is reducing the size of your regular monthly repayments throughout the term of your car loan. This canincrease the affordability of a loan, and the maximum loan size, as well as helping you with cash flow management and more closely matching the repayment of the car loan’s principal with the vehicle’s value over time. If you do elect to add a residual value, it must be made as a single payment at the end of the term of the car loan.
There are usually a few options available to you when your Residual Value/Balloon Payment on a loan is due. These include:
- Paying your Residual Value/Balloon Payment to finalise your loan. This ensures you will keep your current vehicle, and can be made as a cash payment or, if approved, by refinancing your Residual Value/Balloon Payment into a new loan. This essentially continues your current loan to cover the final cost.
- Selling your current vehicle to pay the Residual Value/Balloon Payment and finalise your loan, which can be useful if you wish to change cars. You can then buy a replacement vehicle and apply for a new loan, if needed, to fund the purchase. If you wish to trade in your current vehicle as part of purchasing your replacement vehicle, the payment of the Residual Value/Balloon Payment on the current car loan can generally be accounted for in the changeover process, which will simplify the process for you.
Leases will have different minimum and maximum Residual Value/Balloon Payment guidelines to other car finance options. These guidelines can be found below.
The Australian Tax Office (ATO) enforces a set of minimum Residual Value/Balloon Payment guidelines to be followed for all leases (including Finance Lease, Novated Lease, Personal Lease and Fully Maintained Novated Lease). The ATO minimums are set out in the table below.
|Table 1: ATO minimum residual guidelines for leases|
|Lease contract term||Minimum Residual Value/Balloon Payment|
The maximum Residual Value/Balloon Payment available for a lease will fluctuate depending on a variety of factors specific to each finance company. These can include the term of the lease and what type of read more>>