If you’re exploring your options for car finance, you may come across the terms balloon payment or residual value. These financial features are designed to reduce your ongoing repayments by deferring a lump sum to the end of your loan term—but they also come with important considerations.
How Do Balloon Payments Work?
A balloon payment (sometimes called a residual payment in leases) is a lump sum due at the end of a car loan. By deferring a portion of the loan until the end, your regular repayments throughout the term are lower. For example, if you borrow $30,000 with a 30% balloon, you’ll make repayments on $21,000, then owe $9,000 at the end.
This structure can improve short-term cash flow, making it popular among small businesses and sole traders across Australia. However, the total interest paid can be higher, as the principal reduces more slowly over time.
What Happens When the Loan Ends?
When your car loan term finishes, you’ll be required to repay the balloon payment in full. This can be done by:
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Paying the lump sum with available savings
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Refinancing the remaining amount
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Selling the vehicle to cover the cost
If you’re planning to sell or upgrade your vehicle, the balloon option may suit your strategy. Just keep in mind the resale value—if your car depreciates more than expected, you could be left with a shortfall.
Residual vs. Balloon Payments: What’s the Difference?
While both terms refer to an end-of-loan lump sum, the key difference lies in how they’re calculated and used:
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Balloon payments are common in car loans and are agreed as a fixed percentage of the original loan amount.
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Residual payments typically apply to car leases and are based on the forecasted value of the vehicle at the end of the lease term.
Is a Balloon Payment Right for You?
Balloon payments can be ideal for:
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Business owners needing short-term flexibility
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Borrowers planning to sell or upgrade the car before the loan ends
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Those who want to manage cash flow without higher monthly repayments
But it’s crucial to ensure you have a plan for the final lump sum, otherwise you may face financial stress down the track.
Other Loan Features to Consider
Aside from balloon options, there are a few more decisions to make:
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Fixed or variable interest rates
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Secured vs. unsecured car loans
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Dealer finance vs. bank or online lender options
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