Residual value or a balloon payment explained

Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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, updated on June 9th, 2023       

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The residual value is a term that has been used in the Lease Agreements and it makes reference to the value a fixed asset has when its term has finished. So, if you will take a loan for a car for 5 years, the residual value will be the value it still has after those 5 years have passed.

This residual value is usually established by the financial institution that offers the loan or the lease. The value is determined prior to the start-off of the lending process and it is set up according to forecasts and previous models. Along with the interest rate and the tax, the residual value is also crucial when establishing the monthly payments that are going to be made.

The residual value is going to reduce the monthly instalments which are also known as rentals. The lease agreement will allow the residual value to be paid, just as the last payment has been done.

What is the balloon payment?

The balloon payment, on the other hand, is a term that has been used in some different financial structures such as the consumer loancommercial hire purchase or the chattel mortgage.

The concept is similar to the residual value, in the sense that it represents the amount of money that has remained and that has resulted from the purchase of a vehicle as the last payment that has been made at the end of the term of the car finance. The greatest difference between the two concepts is, however, the flexibility that characterises the balloon amount.

Now, in terms of differences, unlike the residual value, the balloon payment is not based upon forecasts that would indicate the depreciating value of the vehicle in time. This gives the buyer the possibility to choose the size of the balloon payment, depending on the subject to the finance approval and the finance term. There is also the possibility of not having a balloon payment at all, as it is not a mandatory request.

Balloon payment – Benefits

The greatest benefit a balloon payment brings is the fact that it reduces the monthly instalment. The borrower also has the ability to have a wider flexibility in what concerns the refinancing of the balloon by paying it with cash or by trading in the car and refinancing the balloon by using the trade value.

If the vehicle is being used mostly for business purpose, then having a balloon would increase the amount of interest that is payable over the complete term of the car loan. As a result, you will be paying less principal – which is not deductible – with every single repayment you make by having the balloon offset at the end of the transactions.

If the vehicle is used for personal purposes, it would only result in paying much more interest in general, with the main benefit of reducing the monthly repayments.

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