What is a balloon or residual payment?

Buying a new car is exciting. But when it comes to finance, the options available through dealerships can be confusing.

On one hand, dealer finance can seem quick and convenient. The downside is that it can be hard to know if you’re getting a good deal – and how much it will really cost.

Look under the bonnet of a very low rate.

You may have come across dealerships promoting finance at what appears to be very low interest rates. However, read the fine print and chances are this type of finance includes a balloon, also known as a residual payment.

This type of finance works very differently from a traditional car loan. You’re usually asked to make regular payments on your car, often for three to five years. But at the end of that term you still owe money on the car which is often thousands of dollars. That amount is the balloon payment.

A balloon can come as a shock.

In some cases, the balloon can be worth 40% of the car’s original sale price. So it can come as quite a shock to learn that after paying your car off for several years, you can still owe a sizeable lump sum to own the vehicle outright.

It’s this balloon payment that allows a dealer to charge very low rates. It can also be a handy sales tactic.

After years of driving your car, the vehicle’s market value may be less than the balloon by the time the payment falls due. This can encourage motorists to simply roll their finance over to a new vehicle. This creates sales for the car yard. But for the motorist it means more time on the repayments merry-go-round. And ultimately, it just delays the pain of stumping up the cash needed to fund the balloon and own the car debt-free.

Why a car loan can be a better option.

The beauty of a car loan is that it’s a very transparent form of finance. Whereas dealers tend to focus on how much you’ll pay each week rather than the rate involved, a Defence Bank car loan is very clear upfront about the loan rate. This lets you make an ‘apples for apples’ comparison to know if you’re getting a good deal.

Regular repayments, no more to pay.

A car loan is also easy to budget for. The regular repayments are set over the term of your choice, and once you’ve made the final repayment, the car is yours with no more to pay.

Even better, you can count on Defence Bank to make it easy for you to clear the debt sooner. If you’ve got some spare cash, you’re free to put it to work making fee-free extra repayments. It’s a simple way to get ahead with your loan, and save on interest costs without additional charges if you pay off the loan early.

Same rate, new or pre-loved.

The decision to buy a new or used car can often be driven by your budget. However, it’s worth remembering that with some lenders, you can pay a much higher loan rate if you buy a secondhand car rather than a new vehicle.

A Defence Bank car loan comes with the same rate no matter whether you choose a brand new or pre-loved car up to five years old. If you are looking at an even older car, speak to Defence Bank about a personal loan.

To find out more about how easy it can be to arrange a transparent and competitively-priced car loan for your next set of wheels, speak with the team at Defence Bank. Call our Contact Centre on 1800 033 139, or visit your local branch.

Have any questions? We've got the answers. See our FAQs.


Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.

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