A Residual Value is a term used for Lease Agreements. The Residual Value is a forecasted depreciated value of your asset at the end of your Lease term. The Residual Values have set guidelines in place for motor vehicles from the Australian Taxation Office and in most cases with Lease Agreements, Residual Values are mandatory.
Due to the guidelines being set by the Australian Taxation Office under IT28 Ruling, the flexibility to nominate what Residual Value you wish is not usually available and would in most cases be a condition of finance approval by the financier that the Residual Value be in line with the IT28 Ruling guidelines.
A Residual Value does reduce your monthly instalments, referred to as rentals, as opposed to not having any Residual. Your Lease Agreement has the Residual Value due and payable as your very last payment. The financier, referred to as the Lessor, will often allow you to purchase the vehicle for the Residual Value if you wished, or may allow you to Lease the Residual Value again over a mutually agreed term.
A Balloon payment is the term used for other finance structures, such as a Chattel Mortgage, Commercial Hire Purchase (C.H.P.) or a Consumer Loan.
A Balloon payment is similar in the sense it is an offset amount from the purchase price of the vehicle left as a last repayment at the end of the term of your car finance. However, the main point of difference is the flexibility of the balloon amount.
Unlike Lease Agreements, balloon payments are not essentially forecasted depreciated values of the vehicle, which this allows you to often select the size of your balloon payment to a maximum, depending on the term of your finance and subject to finance approval, or not having a balloon payment at all, as it is an option, not mandatory.
Pros and Cons to a Balloon Repayment
The main benefit is to reduce your monthly instalment, leaving the large offset amount as a last payment, where the borrower has the flexibility to refinance the balloon, pay it as a cash lump sum, or the most common, would be to trade the vehicle in, upgrading whilst aiming to have the balloon paid out with their trade value.
As you are offsetting your monthly repayments by having a balloon, this would increase the total amount of interest payable slightly over the full term of the car loan, as you are paying less principal off the loan with each repayment by having the balloon offset at the end. This can sometimes be the aim if you are using the vehicle predominantly for business use, as the principal is not deductible, where your interest may be. If it is for personal use only, you would pay more interest over the full term with the main benefit being the reduction in monthly repayments only.
The other fact that needs consideration is that with a balloon repayment, if you had some period throughout your loan term, where you were unable to pay your payments on time, the lender may not refinance your balloon payment when it is payable, and may also give you a poor reference to other lenders that would have considered refinancing your balloon or financing your new purchase. You may be forced to sell your vehicle to payout your balloon payment without the ability to finance a new car, whereas if you took out a loan without a balloon payment, you would own that vehicle at the end of the term and not be in this position. Some uncontrollable circumstances arise that this could be a real possibility and needs careful consideration when requesting to take out a loan with a balloon payment.
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