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If you're looking at getting a car loan, you may come across some that offer a balloon or residual payment option. These loans can help reduce your repayments but require you to make a large lump sum payment at the end of the loan term.
While a balloon payment can help save you money, it's important to understand how they work and how they differ to residual payments before you take on a loan that offers them as a feature.
A balloon payment is a single, lump sum payment that is made at the end of a loan term to cover the remaining cost of the loan. It is commonly found as part of dealer finance, but is also offered on some car loans. The balloon payment amount is only payable at the end of the loan, meaning it can help reduce the size of your regular repayments.
Both a residual and balloon payment refer to the amount left over at the end of a loan term and which needs to be paid out at that time. The key difference lies in how these amount are determined.
A balloon payment is set in an agreement by the borrower and the lender in order to lower the ongoing monthly repayments and does not take depreciation into account.
A residual payment is forecast based on how much the asset will be worth once the loan term finishes, taking into account depreciation.
Balloon payments offer a number of advantages, including:
Before opting for a balloon payment at the end of your term, ask yourself the following:
John wants to borrow $18,000 for a car, with a loan term of 5 years. While this would normally mean he makes monthly payments of $300, plus interest, he chooses to include a balloon payment of $5,000. This means he only makes repayments on the remaining $13,000 (as well as interest on the entire loan amount), which works out to be $216.67 each month, plus interest.
Many dealerships make their money by refinancing balloon payments. If you're coming to the end of your loan term and unable to pay your balloon payment outright, refinancing is an option to consider.
You should consider this as a new credit product and give it the same consideration as you would give before taking on any other loan. Remember that you don’t need to refinance with the same lender, so you should compare your refinancing options before you apply.
Should you refinance or pay out your novated lease balloon payment?
Car loans that offer balloon payments can be a good option to consider as they help keep your ongoing repayments low. However, as they leave you with a large payment to deal with at the end of your term, it’s important you understand everything about this financing option before you apply.
Is a car dealer liable to disclose a Balloon payment on the loan agreement document, during signing a Commercial loan & mortgage agreement?
Can the dealer charge Balloon payment at the end of the loan period if it has not been agreed upon or shown on the loan document?
Thank you.
Hi Gopinath,
All fees, interest and payments, including balloon payments, need to be properly disclosed to you before you sign on to a loan. If the balloon payment wasn’t in your loan contract then you should get in contact with your car dealer to discuss this. If the issue isn’t resolved (that is, they are still requiring you pay the balloon payment) then you may want to lodge a dispute with the Credit and Investments Ombudsmen. You’re able to lodge a complaint online by visiting its website.
Hope this helps,
Elizabeth