09 Aug What Are Balloon Payments?
How do Balloon Payments help with my loan?
One of the finance terms you may have heard floating around is that of the Balloon Payment.
A Balloon Payment, sometimes called a residual value, is a designated amount owed to the financier at the end of your loan term once all other repayments have been made.
For example, a 5 year loan for $30,000 may have a Balloon Payment amount of $10,000. This means over the 5 years you would make loan repayments to pay off the $30,000, at the end of which you would either pay the $10,000 balloon amount.
What this means is you can lower your monthly repayments by paying off a lump sum at the end of the loan period.
Why Opt For a Balloon Payment?
The main reason for choosing the balloon payment option is to lower your monthly repayments, which can provide a range of benefits for the borrower;
Increased loan size: with lower repayments, the balloon payment option may mean you can increase the loan size to afford a car or item that was previously just out of reach.
Cash flow management: helps with ongoing cash flow management, particularly with businesses that need finance to help increase their profit margins in the long term, or employees who are paid partially in irregular bonuses.
More time to sell: if you’re upgrading to a newer car you can wait for a decent price before selling your current vehicle, knowing that when you do you will have access to the money to cover the balloon amount.
Upgrading: some people use the balloon amount to keep their repayments down on a vehicle they plan on trading in at the end of the term.
Tax deduction: because you are paying less off the principal with each repayment you do end up paying more interest, which can be the aim if the vehicle is for business use. For a business vehicle the principal may not be tax deductible while the interest is, allowing the business to claim a larger tax deduction (talk to your accountant about whether this could work for your business).
What Happens When the Balloon is Due?
Electing a balloon payment amount means that lump sum amount will be due at the end of the loan term. When it is due you will need to pay the full balloon amount to finalise the loan. However, there are some other options available when the balloon amount is due;
Roll over: if you cannot, or do not want to pay the balloon amount you can refinance the remaining amount in a new loan, paying it off over a new loan term.
Sell the vehicle: you can choose to sell the vehicle and use the money to pay the balloon amount. You then have the option of taking out another loan to purchase a new car.
Upgrade: combining the above process, if you trade in the current vehicle for a new one, payment of the balloon amount can be structured into the new loan.
How To Get Finance with Balloon Payment
If you feel having a Balloon Payment on your car loan would work best for you, let us know. We’ll provide quotes for car finance that includes a balloon amount, so you can decide on what works best for your budget.