What is a Balloon Payment & How Does It Work with Your Chattel Mortgage?

Posted on Tuesday, April 29, 2014 - 00:00

If you’re reading up about chattel mortgages, you’ve more than likely come across the term “balloon payment.” You’ve also read how you can work a balloon payment them into your loan package. Balloon payments are also called residual value payments in some documentation. But what are they and how does it work with your chattel mortgage?

Balloon payments explained

A balloon payment or residual value payment is a lump sum payable to your financier or lender at the end of a loan term after you’ve made all your regular repayments. The balloon payment is set aside so your regular repayments are lower than if you paid off the chattel mortgage without one. The balloon payment should equal or be less than the resale value of the car. Here’s an example:

You purchase a vehicle for $30,000 with a 5 year loan at 7.5%p.a. interest rate. Without a balloon payment, monthly repayments work out to $601.14. If you opt for a 15% balloon payment at the end of the loan ($4,500) your monthly repayments drop to $539.09.

At the end of the loan, a borrower can opt to pay out the balloon payment at which point the chattel mortgage is completed. A borrower can also purchase a new vehicle, using the trade-in/sale money to finalise the chattel mortgage.

How they benefit your chattel mortgage

As chattel mortgages are business transactions, companies and ABN holders can claim GST on the purchase price, depreciation, interest payments and of course, any associated GST on your balloon payments. If your business requires a balloon payment to keep your cash flowing, you can rest assured you’re getting all the various GST benefits.

Since a chattel mortgage can be set up to amortise extras such as insurance and scheduled servicing, a balloon payment might be preferable to offset these regular repayments also.

At the end of the chattel mortgage, when you have paid off the balloon, the car will be yours to do with as you please. Trade it in, sell it or keep using it. The choice is yours!

Paired with a low interest rate, a balloon payment could optimise your cash flow, especially if you’re in the early stages of business.

To find out more about chattel mortgages and setting up balloon payments, contact a financial professional to guide you through the process.

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