Understanding Car Loan Balloon Payments and Residual Values
When it comes to selecting a car loan, it’s important to decide whether you’d like a balloon payment or a residual value. After deciding that, you will need to decide how large that it will be. The size of a residual value or balloon payment will affect the amount of your monthly payments and the amount you owe at the end of the loan. A residual value or balloon payment is also known as an RV, balloon or residual payment. Learn more about what does residual mean and how it will affect your loan if you choose one.
What is a Balloon Payment?
A balloon payment is a lump sum that is owed to the financier (lender) at the end of a chosen loan term after all regular monthly payment have been made. This allows the buyer or borrower to repay only the principal part of the loan over its term, which reduces the payments in exchange for the financier a lump sum at the end of the term. For example, a new car buyer borrows $30,000 over a period of 4 years and chooses to have a $10,000 residual value on their loan. This means that their monthly payments will be lower if they had no residual value, however they will still owe the financier $10,000 at the end of the 4-year loan term. When understanding what does residual mean, it is important to understand that this residual value can be a dollar value or a percent of the amount borrowed from the financier. A balloon payment is optional.
When considering what is a balloon payment, it is clear that one of the biggest benefits of this loan arrangement is that it reduces the size of regular monthly payment throughout the entire loan. This can help make the vehicle more affordable as it allows them to use their maximum loan size. It also assists in cash flow management for the borrower during the loan term period. When a borrower chooses to have one, they must pay the lump sum at the end of the terms. However, there are a few options available when this is time to be paid:
- If the borrower wants to keep the vehicle then they can pay the amount and finalise their loan. This amount can be paid in cash or in some instances, be refinanced or rolled over into a new loan.
- If the borrower wants to change cars, they can sell the existing one and use the sale proceeds to pay the amount owed. If the vehicle is being traded in as part of purchasing a new vehicle then the payment can be structured usually into the process, which makes it easier financially for the borrower.
Residual Value and Baloon payment Limits
The Australian Tax Office has a set of minimum guidelines that must be adhered to all leases, whether Novated Lease, Personal Lease, Finance Lease or Fully Maintained Novated Lease. This limit will vary according to the lease contract term.
| Lease contract term | Minimum Residual Value / Balloon Payment |
| 12 months | 65.63% |
| 24 months | 56.25% |
| 36 months | 46.88% |
| 48 months | 37.50% |
| 60 months | 28.13% |
The maximum payment available for a lease depends on the age of the vehicle, the specific type of lease, the term of the lease and the borrower’s financial profile (credit history).
Understanding What Does Residual Mean
There are many factors to consider when choosing residual value, but the most important is the expected value of the vehicle at the end of the loan term. The remaining payment should be less than or equal to the value of the vehicle when the payment falls due. This makes it so if one wants to change vehicle at the end of the loan, they have a zero balance or a deposit to put toward their next vehicle.
When it comes to determining what lease is right for you, it’s important to understand what is a balloon payment. This knowledge will allow you the borrower to make the most informed decision for your financial situation.