Balloon Payments Explained
Many people get confused about balloon payments, but they aren’t as scary as you initially think. A balloon payment is a one-off payment at the end of a novated lease. The amount varies and depends on a few factors: the length of your lease and the car that you have leased.
It isn’t just novated leases that have balloon payments. Other types of car loans, loans for equipment/machinery, commercial properties and some residential mortgages can carry a balloon payment at the end of the loan.
The ATO sets the value of a balloon via their gazetted rates that you can find here. The rates are not pulled out of thin air, and always check to see that the balloon payment matches the residual rates that are set by the ATO. A little tip to remember is that these rates are very conservative, and nine times out of ten, your car will be worth more than these minimum residual value rates on the second-hand market.
Now, when it comes to the end of your lease, you might be worried about having to pay the entire residual value out as it is often tens of thousands of dollars – depending on what car you chose to lease. You have three options when it comes to tackling the balloon payment at the end of your novated lease.
- In many cases, people just sell the vehicle, and most leasing companies can help you with this. Because the ATO residual values are quite conservative, you often will end up selling your car for more than what the ATO sets as the minimum at. When this happens, you get to pocket the difference and get yourself into a new novated lease! This option is good for people who like having a brand-new car every few years.
- You also have the option to roll the residual value into a new novated lease and continue to stay in your car, all while enjoying the tax benefits.
- The last option is to pay the balloon payment for your vehicle. When you do this, you own the car outright, and the novated lease is at an end.
One thing to note is that balloon payments are unavoidable and are attached to all novated leases; these are the rules that have been set out by the ATO. Balloon payments are easy to navigate when you have all the information. Your novated consultant and novated leasing company will guide you through the process when your lease is nearing the end of its life and will have the solutions in place for you. If you have any other questions regarding balloon payments, feel free to reach out to CarBon Leasing today.
