What is a balloon payment car loan?
Many businesses can’t afford the resources to pay for equipment like a car upfront and choose to finance the purchase instead. However, car repayments can be a drain on monthly cash flow. If you want to cut your regular repayments, one option is to get a loan with a "balloon payment."
A car loan balloon payment is a large one-time repayment you make at the end of your loan term. So instead of paying off the full loan amount with regular monthly payments over the term of the loan, a chunk of it is deferred until the end. This portion of the loan becomes the balloon payment (sometimes, incorrectly referred to, as a residual)1. It's generally between 20 to 40% of your loan amount depending on what you agree with your lender.
Depending on your business cash flow, a balloon payment could make sense for many reasons – although there are some downsides to consider too.
A main benefit in deciding on a balloon payment is it lowers your monthly repayments, freeing up cash and making it easier to fit the new acquisition within you monthly budget.
At the conclusion of the loan term, when the ballon becomes payable, you can generally choose to upgrade the vehicle and refinance the balloon amount. Often the trade or residual value of the vehicle matches the balloon amount, so you end up just financing the cost of the new vehicle.
This is an important aspect to consider when choosing a balloon amount: what will be the trade-in value of the vehicle at the end of the loan term?
To make a fair decision, you need to consider any potential drawbacks. An obvious downside is you’ll be left with a lump sum to pay at the end of the term. Refinancing a balloon happens frequently but you don’t know where your business will be in the future and your circumstances may preclude it. Also, a balloon amount can sometimes be determined by the aspects of the vehicle – some vehicles work with a balloon some don’t.
When used correctly, balloon payments are a very useful tool. Just make sure you consider all aspects of your purchase and business circumstances and consult an experienced advisor.
Whether your business is looking to secure a new vehicle, refinance an existing loan or simply discuss your business’s finance options, call the team at Etairos Finance.
Jaeneen on 0402 684 199 or Paul on 0466 886 252
A residual is a payment at the end of a lease and based on the estimated value of the car after depreciation.
