Put simply, a residual value and a balloon payment are the same. Both refer to a pre-agreed payment due at the end of a loan for a vehicle or machine. If the loan facility was a finance lease, then the amount at the end of the lease is called a residual.
A residual or balloon payment is a final lump sum you are required to pay at the end of your loan term to own an asset outright. Usually, the lump sum is equivalent to – or less than – the depreciated value of the asset. Opting for a residual payment at the end of the term means your weekly payments are smaller and you.
Residual valuesA residual value or balloon payment is where an amount of the total value of the car is deferred or postponed to the end of the contract. For example, if you buy a car for R300 000 with a residual of 30% (R90 000), that R90 000, plus interest, is only due at the end of the contract.
Balloon payments allow borrowers to reduce that fixed payment amount in exchange for making a larger payment at the end of the loan's term. In general, these loans are good for borrowers who have excellent credit and a substantial income.
Benefits of Balloon Payments
Reducing the monthly repayment amount; Improving the cash flow of the borrower; Increasing affordability and the ability to upgrade to a better model of car; Enabling you to consider increasing the maximum loan size so that you can purchase a higher quality vehicle; and.
If your car is worth more than the balloon payment at the end of the contract, then paying this could leave you better-off in the long run, even if you don't want to keep the car. You could sell the car immediately, leaving you with a surplus amount.
If you currently have a balloon payment, the most-effective ways of popping the balloon are to follow one of the following tactics: Use any surplus funds that you might have to settle your debts quicker. Open a savings account to save up for when the balloon payment becomes due.
Example of a Balloon Loan
Let's say a person takes out a $200,000 mortgage with a seven-year term and a 4.5% interest rate. Their monthly payment for seven years is $1,013. At the end of the seven-year term, they owe a $175,066 balloon payment.
You must refinance well in advance of the payment due date in order to ensure that you have the time to qualify and close the refinance. If you successfully acquire the refinance, you can kill two birds with one stone by paying the balloon mortgage off and getting a new loan with terms more suitable to you.
According to the Motor Finance Corporation, even though the balloon payment is used to reduce your monthly instalments, it remains part of your finance agreement. This means that, when you ask for a settlement amount on your vehicle, the balloon amount is included in the calculation of the settlement amount.
A residual is very much like a balloon payment but it takes the form of a lease agreement. It is also known as a non-ownership residual. The lump sum payable at the end of the financing period is calculated according to how much the vehicle will be worth at that time.
Balloon financing means a portion of the selling price – the balloon – is payable only at the end of the loan agreement. This reduces the monthly instalments but the balloon payment still lies in wait. The balloon can be as much as 20% or 35% of the selling price.
Subtract the Depreciated Value from the Original Value
Look up the original value of the car in your lease terms or on the Kelley Blue Book website. Subtract the calculated depreciation value from the original value of the vehicle. This new result is the total residual value of the car.
The biggest advantage of a balloon mortgage is it generally comes with lower interest rates, so you make smaller monthly mortgage payments. You also may qualify for a larger loan amount with a balloon mortgage than you would if you got an adjustable-rate or fixed-rate mortgage.
Can you refinance a balloon payment? It is possible to refinance your balloon payment. Refinancing can offer a lower interest rate which can give you access to better rates and fees. You can also make better repayments when it comes to paying off your balloon payment.
A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan.
Balloon payment schedule
A 30/5 structure means the lender calculates your monthly payments as if you'll be repaying the loan for 30 years, but you actually only make those payments for five years. At the end of the five-year (60-month) term, you'll repay the remaining principal, or $260,534.53, as a lump sum.
What is a balloon payment? In short, a balloon payment is exactly the same as paying a deposit on a motor vehicle, but with one very important difference: A deposit is paid by the vehicle buyer upfront, while a balloon payment is paid at the end of the finance period.
Can you refinance a balloon mortgage? Thankfully, you can. And unless you're simply rolling in dough, you may be forced to refinance. A balloon mortgage is a home loan with a short term, often 5 - 7 years, after which the rest of the loan is due in one large payment, called a balloon payment.
You may see a Buyout Amount or Payoff Amount listed in your monthly leasing statement. This buyout amount includes the residual value of your vehicle at the start of the lease, the total remaining payments, and possibly a car purchase fee (depending on the leasing company).
In accounting, the residual value is an estimated amount that a company can acquire when they dispose of an asset at the end of its useful life. In order to find an asset's residual value, you must also deduct the estimated costs of disposing the asset.
The aforementioned residual value and purchase fees are negotiable, particularly at lease end. In most cases — though not all — the predetermined residual value will be higher than the price you would pay to purchase a vehicle of the exact same make, model and year from a dealership.
You can only sell your car once you have finished your contract, made all your monthly payments and paid the option to purchase fee (Hire Purchase) or the balloon payment (Personal Contract Purchase) which makes you the vehicle's legal owner.
Paying off a car loan early can save you money — provided there aren't added fees and you don't have other debt. Even a few extra payments can go a long way to reducing your costs. Keep your financial situation, monthly goals and the cost of the debt in mind and do your research to determine the best strategy for you.