Residual Values and Balloon Payments

Residual values and balloon payments are examples of car finance jargon. If you’re looking for finance to buy a car, it’s important that you understand what these terms mean.

Read on to find out everything you need to know about residual values and balloon payments, including answers to FAQs.


What is a balloon payment?

A balloon payment is a single repayment at the end of a loan term. Balloon payments can be used for different types of loans, including both personal and business car loans.


What does a balloon payment mean?

The ‘balloon payment’ name reflects the fact that this single payment at the end of the loan is larger than the regular repayments during the term of the loan.

Most  lenders will offer balloon payment options of up to a maximum of 50% of the amount borrowed. The maximum amount will usually depend on the loan term. Generally the shorter the term, the higher the maximum (and vice versa).


Balloon payment car loan

A balloon payment car loan involves you making lower regular repayments and a larger final one at the end.


Let’s say you borrowed $30,000 over 5 years at an interest rate of 3% with a 30% balloon payment at the end. Your regular monthly repayments over the 5 years would be $400 and your final one would be $9,000.

If you wanted to lower your repayments, you could increase the loan term. Most lenders will offer car loans for terms up to 7 years. For example, if you increase the loan term to 7 years in the example above, your regular monthly repayments would drop to $300.

You could also lower your repayments by increasing your balloon amount if your lender will allow it. For example, if your balloon payment was $12,000 in the example above with the 5-year term, your monthly repayments would drop to $353.


Car loan calculator with balloon

A range of online calculators are available to help you work out your repayments with different loan amounts, interest rates, loan terms and balloon amounts.  You can enter a free quote below on our website tool and you can calculate your repayments with a balloon.


The pros and cons of a balloon payment

Balloon payments on car loans have their pros and cons. Let’s look at each in turn.


  • A balloon payment lowers your regular monthly repayments.
  • The lower monthly repayments can help you to get approved for a larger loan to buy a better car.



  • You pay more interest when a balloon payment is included in your car loan.
  • You need to ensure you can afford to make your larger payment at the end of the loan term. To afford this you can sell your car, payout the amount in cash, or -commonly- get a further loan to refinance the balloon amount.


Is residual value the same as a balloon payment?

No. The terms often get confused and used interchangeably, but technically speaking, balloons apply to car loans and residual payments apply to leases.

In the context of a standard car loan or chattel mortgage: A balloon payment is how much you agree to pay to the lender as the final instalment for your car.

In the context of a lease or novated lease: If your lender wants you to make a residual value payment instead of a balloon payment at the end of your loan, they will forecast the expected market value at that time and include this amount as the final amount due on your loan. Beware! It’s another hidden cost of novated leases that these residual value payments can be set high, much higher than the car is actually worth!

Some vehicles hold their value over time better than others, and they will have higher residual values accordingly.


What is a residual or balloon payment?

Residual payments and balloon payments both require you to pay a single, larger amount at the end of your loan term. The only difference is how the amount is calculated (i.e. the forecast market value for a residual payment or an agreed value for the balloon payment).

Residual value amounts are common with car leasing arrangements.


What is a balloon residual?

The terms ‘balloon’ and ‘residual’ are often used interchangeably or together. However, it’s important to understand that they technically mean two different things, as outlined above.

Usually if the terms are used together on a car loan, it means a single larger repayment that’s based on the car’s forecast market value at the end of the loan, rather than an agreed value.


Car loan lenders will cap your residual amount (e.g. maximum of 35% residual after a 5 year loan term) to help ensure the borrower isn’t left with a higher payment than the car is actually worth.  Novated leases, on the other hand, will often set the residual ‘market value’ higher than the car is worth!


Other FAQS

What are your residual or balloon payment options at the end of your car loan term?

You usually have 3 options:

1) use your own funds to make the payment.

This means you will need to save the amount during the loan term. Once you have made your final payment, you will own the car outright. However, you may be better off making extra repayments instead because you’ll be charged less interest on a lower loan balance.

2) trade your car in to get the funds you need.

This means that you will have to buy another car. It can be a good chance to upgrade and arrange finance for your new car at the same time.

3) refinance the residual or balloon payment amount into a new loan.

If you are approved, this means you will keep paying off your car. You may be able to refinance your residual or balloon amount owing with your existing lender or a new lender. The main thing is to find yourself a great deal. A car finance broker can help you to do that.


Should you get a car loan with balloon payments?

This depends on your individual financial situation and goals. The pros of doing it should outweigh the cons.  You can speak with a broker about your individual needs.



How we can help

If you’re looking to buy a new car and you need finance, talk to our expert brokers at Auto Car Loans.  We’ll take the time to understand your situation before finding you a great deal.

Don’t waste your time trying to find a great deal yourself or let yourself get talked into dealer finance at a car yard. If you do, you’ll end up paying more. We work for our car buying clients, not for lenders or dealers.

We arrange vehicle finance for a living from a panel of over 50 lenders. We will also help you with your loan application paperwork.

Get in touch with one of our experienced finance brokers today by calling 1300 301 051 during business hours.

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