When you’re looking to purchase a vehicle under finance, you may come across the term residual or balloon payment. So what is a residual/balloon payment and when would it make sense to have one in your finance contract?

What is a Residual/Balloon payment?

A residual or balloon payment is a lump sum payment that is payable to the financier at the end of the loan term in addition to the regular repayments. For example, a 40% balloon payment on a $20,000 loan would mean that $8,000 would be payable at the end of the loan term. This means that your weekly/monthly finance repayments are calculated on only a part of the total loan value, thereby reducing your ongoing repayments. However, it is important to keep in mind that you will owe the financier the additional 40% lump sum at the end of the loan term.

Is there a difference between a residual and balloon payment?

Both a balloon and residual payment involve paying a specified amount at the end of your finance contract, with the intention of reducing your ongoing repayments over the course of your loan. A residual value is generally used in car lease scenarios and factors in forecasted deprecation of your vehicle at the end of the lease term. A balloon payment generally relates to car finance and is similar to a residual value as it is an amount that is offset from the purchase price of the vehicle and left as the final amount owing at the end of the term of your car finance.

Pros and cons of a Balloon payment

A balloon value can be used to lower your minimum monthly or weekly finance repayments; however, it is important to factor in the lump sum balloon value that will be due at the end of the term.

How do balloon payments impact my vehicle’s resale value?

Ideally the balloon value owing on your vehicle should be less than or equal to the resale value of your vehicle at the end of the loan term. Alternatively, a balloon value can usually be refinanced (subject to approval criteria) at the end of the original loan contract if you wish to keep the vehicle.

For more information on balloon and residual payments and the pros and cons of each, speak to our friendly team today on 1800 538 287, they’re always happy to help.