Everything you need to know about your balloon payments

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.

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What is a balloon payment?

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.

What’s the difference between a balloon and residual payment?

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.

What are the benefits of a balloon payment?

Balloon payments offer a number of advantages, including:

• Repayment reduction. This is the main advantage of balloon payments. The amount is subtracted from the principal loan amount and your repayments are lowered as a result. This can allow you to finance your car purchase while still keeping your repayments affordable.
• Flexibility of the balloon payment amount. The amount of the payment is generally flexible, so you can agree on the amount with the lender. A standard payment is a few thousand dollars, but can be more or less depending on the lender.
• Business benefits. The increased amount of interest payable may have benefits to those borrowing for business purposes. You will be paying less principal and more interest, and as the principal is non-deductible this can work out in your favour in terms of tax.

What to consider when comparing financing options with balloon payments

Before opting for a balloon payment at the end of your term, ask yourself the following:

• How much additional interest will you be paying? While your repayments are lower, working out how much the lowered repayments are costing you in additional interest over the loan term is an important step. Are the long-term costs worth the short-term savings?
• How will you pay off the balloon payment? Do you have a savings plan to be able to pay off your balloon payment at the end of the loan term? Will you be refinancing or putting it on a credit card? Do you have an end-goal in mind for how you will manage the payment?

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Name	Product	Interest Rate (p.a.)	Comparison Rate (p.a.)	Min Loan Amount	Loan Term	Application Fee	Monthly Service Fee	Monthly Repayment
IMB New Car Loan		4.99% (fixed)	5.34%	$2,000	1 to 7 years	$275.12 ($250 Application fee + $25.12 PPS registration fee)	$0		You'll receive a fixed rate of 4.99% p.a. A low minimum borrowing amount of $2,000 that you can use to purchase a new car or one that's up to two years old.	Go to site More Info	Compare	loading Fetching your data...
Loans.com.au - New and Dealer Used Car Loan		From 4.67% (fixed)	5.22%	$5,000	3 to 5 years	$400	$0		You'll receive a fixed rate from 4.67% p.a. based on your risk profile Finance a new car and benefit from features such as fast approval, no ongoing fees and an optional balloon payment. Note: Settle the loan before 30 November 2020 and enter the draw to win a $1,000 fuel voucher. Terms & conditions apply.	Go to site More Info	Compare	loading Fetching your data...
Credit Concierge Car Loan		From 4.45% (fixed)	5.29%	$10,000	1 to 7 years	$350	$5		You'll receive a fixed rate of 4.45% p.a. with a comparison rate of 5.29% p.a. Get access to over 20 providers to fund a new or used car.	Go to site More Info	Compare	loading Fetching your data...
CUA Secured Fixed Car Loan		6.79% (fixed)	7.16%	$5,000	1 to 7 years	$265 ($175 Establishment Fee + $90 Security Administration Fee)	$0		You'll receive a fixed rate of 6.79% p.a. A secured loan with a high maximum borrowing amount up to $100,000. Redraw facility and no monthly fees.	Go to site More Info	Compare	loading Fetching your data...
NRMA New Car Loan		From 4.99% (fixed)	5.69%	$5,000	1 to 7 years	$499	$0		You'll receive a fixed rate from 4.99% p. a. Purchase a new or used car up to 2 years old and benefit from a fixed rate and no monthly fees. Pre-approval available within 5 business hours.	Go to site More Info	Compare	loading Fetching your data...
Plenti Car Loan		From 4.89% (fixed)	5.44%	$10,000	3 to 7 years	from $249 to $799	$0		You'll receive a fixed rate from 4.89% p.a. Borrow up to $100,000 with a Plenti Car Loan and benefit from no early repayment or exit fees.	Go to site More Info	Compare	loading Fetching your data...
Driva Car Loan		From 4.34% (fixed)	5.5%	$2,000	1 to 7 years	$295 (Varies by lender, starting from $295)	$10		You'll receive a fixed rate from 4.34% p.a. Borrow up to $250,000 with loan terms from 1 to 7 years. Get access to a range of lenders.	Go to site More Info	Compare	loading Fetching your data...
NAB Personal Loan Unsecured Fixed		From 9.99% (fixed)	10.88%	$5,000	1 to 7 years	$150	$10		You'll receive a fixed rate between 9.99% p.a. and 18.99% p.a. ( 10.88% p.a. to 19.83% p.a. comparison rate) based on your risk profile An unsecured loan up to $55,000 you can use for a range of purposes and pay off over up to 7 years. Note: Majority of customers will get the headline rate of 12.69% (13.56% comparison rate) or less. See Comparison rate warning in (i) above.	Go to site More Info	Compare	loading Fetching your data...
Symple Loans Personal Loan		From 5.75% (variable)	6.47%	$5,000	1 to 7 years	from 0% to 5% of the loan amount	$10		You'll receive a personalised interest rate from 5.75% p.a. to 21.99% p.a. based on your risk profile Borrow up to $50,000 to pay for what you need.	Go to site More Info	Compare	loading Fetching your data...
NRMA Used Car Loan		From 6.49% (fixed)	7.19%	$5,000	1 to 7 years	$499	$0		You'll receive a fixed rate from 6.49% p.a. Finance a used car with NRMA and benefit from a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.	Go to site More Info	Compare	loading Fetching your data...

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Should you refinance a balloon payment?

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.

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