A red balloon full of air. A red balloon full of air.
A red balloon full of air.

A red balloon full of air.

Obtaining finance for any purpose  requires a process of comparisons, financial self-education, and decision making. A popular feature sought amongst borrowers is a ‘loan residual’ or ‘balloon payment’. In this blog, we will explore the factors to consider when incorporating a balloon at the end of a loan term, providing you with insights to make an informed decision that aligns with your loan objectives.

Understanding loans with a balloon (residual)

Finance with a balloon is a loan product which offers lower repayments throughout the loan term, with a lump sum payment known as the balloon or residual due at the end. This feature is particularly popular amongst those seeking lower weekly, fortnightly or monthly repayment structures, in hopes of maintaining reasonable cash-flow or savings.

Advantages of loan residuals:

Lower repayments:

The primary attraction of loans with a residual lies within the lower repayments, offering immediate relief to borrowers managing a strict budget or savings regime. This structure allows for funds to be dispersed amongst other expenses whilst still progressing towards paying off the initial loan. Applicants can calculate how much they will be able to afford with the use of a loan repayment calculator, giving them the ability to plan exactly what their financial commitment will be before proceeding with an application.

Flexible loan terms:

Balloons provide a level of flexibility in regard to the structure of the loan term, allowing applicants to be in control of how long they commit to their loan for. Most applicants who opt for finance with a balloon commit to a shorter loan term as their repayments are lower based on the residual at the end.

Short-term ownership plans:

Those opting for a low rate car loan, boat loan, business vehicle loan, or any other secured finance may plan to turn over their asset within a shorter time frame compared to those who are looking for a long term commitment. It’s not uncommon for people to sell the asset at the end of the loan term in order to pay the balloon off in full, as opposed to having to source the funds to pay the lump sum out.

This is where ‘Balloon Finance’ can come in handy. People who are not in a position to sell the asset their loan is securitised against may opt to finance the balloon into a more achievable repayment. Reasons they may not be able to sell the car, motorbike etc. could be due to depreciation, or lack of interest in the market. For those who do not have access to funds to readily settle the remainder of the loan residual, balloon financing provides a suitable strategy to alleviate these stresses.

A man driving a car in the sunshine

Considerations before opting for a loan with residual:

Balloon amount:

Thoroughly assess and plan for a strategy to be able to manage the lump sum payment at the end of the loan term. Most loans with residual will be approved based on a percentage of the borrowed amount. It’s important to calculate what is going to be affordable throughout the term of the loan, given the lump sum requirement at the end. Discussing your options with an experienced finance broker will help to provide clarity on what options may be best suitable to your individual circumstances.

Interest rates:

With most of the appeal of a loan with residual deriving from the lower repayment structure throughout the loan term, it’s important to be mindful of the interest rate that is attached to the product you opt for. Some loans with balloons incorporated can attract higher interest rates when compared to  low interest rate car loan that does not offer a lump sum end of term payment.

  • It depends on what your main objective is when approaching your next loan. Some people prefer to protect their cash flow by lowering repayments for the majority of the loan term, whilst others prefer to keep interest at an all time low, even if this causes their regular payments to be higher. Our dedicated team of lending specialists will be able to have informed conversations with you to determine what will benefit you most during the course of your next loan.

Future financial stability:

Evaluating your anticipated future financial stability before committing to a loan in any form is integral to preventing any hardships or credit impacting events. Ensure that your income is expected to increase or remain stable to comfortably manage your repayments and potential balloon repayment. Keeping in mind that there are options to finance the balloon lump sum at the end of the loan term, permitted your profile suits the same requirements as a personal loan application.

Financing the residual (lump sum) payment:

Savings and investments:

Exploring the possibilities of financing the lump sum as your loan matures can help alleviate financial stress by dispersing the cost over broken down repayments as opposed to having to source funds in a short amount of time. Planning ahead and strategically ensuring you have a solution in place helps mitigate the impact of the balloon, whether that be with savings or a refinance option. Refinancing can come in several different forms: car loan refinances; where an entire car loan is replaced with another, or a personal loan used to cover the cost of the residual.

Refinancing Options:

As mentioned above, consider the potential of refinancing the balloon payment as the end of the loan term approaches. Securing a low interest rate car loan, motorbike loan or other loan is the main objective for most applicants, however it’s important to plan ahead to ensure your financial situation is not compromised when it comes time to pay the remainder of the loan residual.

Negotiating with the lender:

Engaging in open communication with your lender to discuss options for the loan term, interest rate, repayments and fees associated is important. Some lenders may offer options at the end of a loan to refinance the residual. Your experienced finance broker will be able to present all options to you in an easy to understand format, ensuring you have secured the most cost effective loan suited to your needs.

Conclusion:

Financing a lump sum balloon payment at the end of a loan requires careful consideration and is often best arranged with the support of an experienced finance broker. While balloon payment loans offer advantages such as lower repayments and flexibility, it’s essential to weigh these benefits up before making your next financial commitment. By thoroughly understanding the terms, considering your financial situation, and comparing all loan options, you can approach your next finance journey with confidence.

If you’d like to discuss finance options for loans with residual features, we’re ready to talk! Give us a call on (07)3505 3099, or have us call you.

 

 

 

 

 

About the Author


Rowdie Lang

Rowdie has been a part of our Team since 2020. He has witnessed firsthand the ongoing evolution of the finance industry as technology continues to change the way customers' access financial services. He has a passion for helping people and relishes the opportunity to work alongside our teams every day as they help our customers financial dreams come true.

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