Car Loans with Residual
Have you ever seen the terms ‘balloon’ or ‘residual payments’ when you flip through ads for a car loan? Do you know what is a balloon or residual payment is?
Usually, a balloon payment can bring lower payments, so borrowers tend to overlook all the implications of car loans with a residual. If you are thinking about whether to get a car loan with a residual or not, here are some suggestions we have for you.
What is a residual or balloon payment?
Residual/balloon payment is a lump sum payment that is due at the end of your loan. Normally, your loan amount will reduce to a $0 balance at the end of the loan term. If you are getting a car loan with a residual/balloon payment, the loan balance will only reduce to the agreed residual amount. This means you will need to pay a significant final payment at the end of your car loan.
Usually, each lender has their own set residual amounts for different loan terms. Below are example’s of how most lender’s will decide how much your balloon payment will be:
|Loan Term||Residual Amount (% of the financed amount of the car cost)|
50% - 55%
45% - 50%
35% - 40%
30% - 35%
So, if you are purchasing a $50,000 car with $10,000 deposit and your loan term is 3 years, your residual payment might be:
($50,000-$10,000) x 45% = $18,000
What do I need to know about a car loan with residual/balloon payment?
If you find the concept of residual payments confusing, the list of pros and cons below will help you gain a better understanding of car loans with residual payments.
Lower repayments: As you are deferring a portion of your loan to be paid out at the end of the term, this will provide you with a lower monthly holding cost compared to a standard car loan that will reduce to $0 by the end of term.
Higher interest amount
Residual amounts are not interest-free. The interest amounts are included in your repayments. Having a residual amount brings slightly higher interest charges over the term of the loan compared to no residual. A lot of borrowers, however, prefer a lower monthly holding cost even if they pay just slightly more interest over the loan term.
Risk of not being able to cover the final payment
Cars are depreciation assets. The market value of your car may depreciate to an amount that is lower than your residual payment amount by the end of your loan term. You might find yourself in a position where the proceeds from the sale of your car doesn’t cover the balloon payment.
For this reason, lenders have rules around allowable percentage amounts against the loan term. That being said, the used car market can be unpredictable and you might find that even though there are formula’s in place to make sure your car’s value will cover the balloon payment, end of term, there is always a risk involved that a particular make or model’s value has dived south outside of the normal depreciation rates for some reason.
What if I cannot make a full payment for the residual or balloon at the end of the loan term?
You have a few options if you cannot make full balloon payment.
You might be able to refinance your balloon payment. Refinancing your balloon is essentially extending your loan terms. It gives you more time to pay for the balloon payment.
Sell the car
You can sell your car. If the proceeds of the sale is higher than the balloon payment, your loan with settle itself. However, if the car sell’s for a price that is lower than the balloon payment as discussed above, then you will need to cover the GAP, What if you cannot pay for the gap?
A personal loan can be handy if you cannot pay for the gap through savings.
Ideally you don’t want to be in a situation where there is a GAP and usually there isn’t but just be conscious of your cars ongoing value as you work through your loan.
Are car loans with residuals usually for business owners or consumer?
Residuals are a very popular loan feature that many business owners utilise. For a business, cash flow is very important, so getting a business car, on the road, for the lowest possible monthly holding cost is generally the objective. Furthermore, when a business uses their car for business purposes, they usually drive a lot of kilometers and by the end of the loan term, they are ready for a replacement. A balloon is great tool when the objective is to continuously upgrade your business car and when monthly cash flows are front of mind.
How do I know if I should get a car loan with a residual?
It all comes down to your individual circumstances, budget, and objective. Usually, business owners will opt for a balloon, but not always. It’s the same thing for a consumer. If you don’t plan on replacing your car at the end of term and your repayments without a balloon easily fits within your monthly budget, then a balloon may not be worth it.
That being said you might have a scenario whereas a business owner you need a particular type of vehicle. Without a balloon payment, the repayments are too high to fit in with monthly cash flows, a balloon payment in this scenario is a must as it will allow you to purchase the vehicle that’s required to get the job done.
For a consumer it doesn’t have anything to do with getting a job done but instead, it may get you into a car that stretches the budget without a balloon. This works well for some employees that get bonuses paid half-yearly or annually for example. Monthly they receive their base salary which covers the basics and then they get a large bonus end of the year which allows for extra payments.
Compare car loans and calculate your repayments
|Lender||Product Name||Advertised Rate||Comparison Rate||Monthly Repayment|
|Savvy||New Car Loan|| 2.99% |
|Bank of Australia||Used Car Loan|| 6.45% |
|ANZ||Online Secured Car Loan|| 7.85% |
|CUA||Fixed Rate Car Loan|| 7.99% |
|BankSA||Secured Fixed Personal Loan|| 8.49% |
|St George||Secured Fixed Personal Loan|| 8.49% |
|CBA||Secured Car Loan|| 8.49% |
|NAB||Variable Rate Personal Loan|| 14.19% |
* Commercial loan with the loan amount of $40,000 is looking at a 5 year secured fixed rate of 2.85% p.a. and comparison rate of 3.93% p.a.. WARNING: all fees and charges may not be included on the example above, only the comparison rates, monthly repayment and total cost applies. Therefore, the total cost of the loan might be different. Comparison rate do not include broker fees, redraw fees, early termination fees and fee waivers. Comparison rate may change as a result of the different loan terms, fees and the loan amounts. Establishment fees and monthly fees do not apply to commercial loans, only consumer loans. However, there might be different fees apply.