Car Finance: What are Balloon Payments & Residual Payments?A Balloon Payment, is a great way to lower your car loan repayments by leveraging value your car will still hold at the end of the loan.
Typically when purchasing a car, you will either trade in your existing car, or put down a cash deposit, which then helps reduce your repayment amounts. With a balloon payment it’s kind of like a ‘reverse deposit’: you pay the deposit at the end. This means you don’t have to have that trade-in or cash up front, yet you still get to benefit from the lower repayments – as if you did.
For example, if you want to purchase a $30,000 car and utilise a $10,000 balloon payment, over the course of the loan term, you will pay off $20,000 (plus interest) rather than the full $30,000. So your monthly repayments will be a lot lower during the loan term. Then the very last payment is a larger lump sum of $10,000.
So you see, instead of paying $10,000 at the start to deposit on the car – you simply pay it at the end.
What happens when it’s due?
At the end of the term, you’ll generally have three options to choose from when your balloon payment is due:
1. You can simply pay the lump sum amount and then you’ll own the car outright; or,
2. You can trade in the car, or upgrade the car – meaning the lump sum payment can be deferred into your new car loan; or,
3. You can re-finance the balloon payment amount over a year or two so you can have more time to pay it off, and keep the car, too! Often people choose to refinance the balloon so it has the same monthly repayments as the original car loan.
Is a balloon payment the same as a residual payment?
Generally speaking: yes. A balloon payment and residual payment share all the same repayment characteristics and options, and the terms are often used interchangeably in the car finance industry. However, technically speaking, there are a two key differences:
1. Residual payments are often associated with (less common) car leases – not loans; and,
2. The amount of the residual payment is based on the fixed value of the car after depreciation – not just some ideal deposit amount.
Personal car loans and business chattel mortgages represent most of the car finance we do at Auto Car Loans, both these loan types involve balloon payments, not residual payments.
Is this right for you?
With so many options to choose from when talking about car finance, it can sometimes be hard to see ‘the forest for the trees’. So if a balloon payment sounds good to you, then the next step is to pick up the phone to have an obligation free chat with one of our team. We’ll talk about your specific situation, the repayments you can afford, how much the balloon payment will be and then take the next steps from there. Just give us a call on 1300 301 051 or reach out via our contact page.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.