A balloon payment is an amount due in full to the lender at the end of the loan period, after all scheduled monthly loan repayments have been completed. This enables you to repay your loan over its term, at reduced monthly installments.
And how is the payment calculated?
For example:
- Let’s say you buy equipment, borrow $40,000 over five years, and elect to have a $10,000 (25%) balloon payment on your loan.
- Your monthly repayments will be lower than if you had no balloon; however, you will still owe the lender $10,000 (balloon payment) at the end of the loan.
Is there a difference between balloon and residual payments?
Both a balloon and residual payment imply paying a defined amount at the end of your equipment loan, specifically designed to reduce your ongoing repayments throughout the life of your loan prior to the end of the term. Commonly related to leases (not loans), residual payments are a factor of the final estimated value of your equipment or vehicle when accounting for depreciation considerations.
What are the benefits?
The main benefits to having a balloon payment when arranging your loan.
- Lower monthly repayments: Loans with balloon payments offer reduced monthly repayments compared to a fully amortising loans.
- Flexibility: Balloon payments provide flexibility, allowing you to tailor your loan to your specific needs and budget. You can choose a balloon payment amount that suits your financial situation. (providing it fits the lender’s guidelines)
What happens at the end of my loan term?
If your loan has a balloon payment, it must be paid at the end of the loan term.
However, there are generally a few options available when the balloon payment is due:
Keep the equipment or vehicle:
- Pay the balloon payment and finalise the loan.
- Refinance or “roll over” the balloon payment into a new loan.
Purchase new equipment or a vehicle
- Sell the current vehicle, pay off the balloon. Use surplus equity as deposit on the new vehicle.
- Trade the vehicle. The dealer will payout the balloon and invoice the new asset, which can be financed in full.
Talk to our team of specialists.
By talking to one of our equipment finance brokers, you’ll be able to find out how to strike the right balance between your monthly repayments and your end-of-term obligations. We have access to a wide range of lenders and finance products available. We’ll look at your individual financial position and help you find an option that suits your requirements.
If you need help choosing the right balloon payment for you in the current market, and considering your future equipment needs, Contact our finance experts today on 0434 294 549 to see how we can help you.