Balloon Payments Explained
Many people get confused about balloon payments, but they aren’t as scary as you initially think. Balloon payments work as a one-off payment due 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. These balloon payments are usually the final payment you’ll need to make at the end of the loan.
Are Balloon Payments Exclusive To Novated Leases?
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.
How Are Balloon Payments Calculated?
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.
How To Pay Balloon Payments
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.
Why Do You Need To Pay Balloon Payments?
Balloon payments are unavoidable and attached to all novated leases. These are the rules as they have been set out by the ATO. Be sure to keep these balloon payment requirements in mind when taking out a novated lease on a new vehicle.
Navigating Balloon Payments with CarBon
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.
Balloon Payment FAQs
Still have questions about balloon payments? Find common questions about balloon payments and what to expect at the end of the loan below.
How do I calculate my balloon payment?
Your balloon payment is based on the ATO’s minimum residual value percentages, which are set according to the length of your lease. As a guide, the standard rates are:
1 year: 65.63%
2 years: 56.25%
3 years: 46.88%
4 years: 37.5%
5 years: 28.13%
The relevant percentage will be applied to your vehicle’s price to work out the residual value. For example, on a $40,000 vehicle over a 5-year lease, the balloon payment would be around $11,250. We’ll work with you to confirm the exact figure and calculation method for your lease as balloon payments are different for everyone.
How much are balloon payments usually?
There isn’t a standard amount that you can expect as balloon payments are determined by the price of your car and how long your lease runs. It is best to work with your consultant to determine the balloon payment that will match your specific circumstances and novated lease.
Can you pay off a balloon payment early?
In most cases, it is possible to pay balloon payments early. However, we always recommend speaking to your consultant to ensure this is a smart move for you and your financial situation.
What happens if you can’t afford a balloon payment?
If you can’t afford the total amount of balloon repayment at the end of your lease, that’s okay. You have options available to you to avoid having to make a large payment at the end of your lease. Most people either sell their vehicle, which is something we can help you with. The benefit here is that you get to pocket the difference between the balloon payment and the vehicle’s sale price, leaving you with more cash than you may expect! Other options include rolling the residual value into a new novated lease or refinancing the balloon payment separately. It’s always best to start these conversations with your consultant early so you can make future plans and give you peace of mind.
Can I pay my balloon payment in monthly repayments?
The balloon payment structure means that you’ll have to a single lump sum payment at the end of your novated lease. If you would prefer to make smaller monthly payments, then we’d recommend discussing rolling the residual value into a new novated lease. This helps you spread payments out and lets you step into a new car. Speak with your consultant to see if this option makes sense for you and your budget.
