When obtaining business finance, including truck loans, business operators are presented with the opportunity to incorporate a balloon component within the loan structure. A balloon or residual can be artfully leveraged to tailor a loan in accordance with the distinct financial objectives of the business. These objectives might encompass achieving a preferred monthly repayment figure.
The inclusion of a balloon or residual constitutes a pivotal facet of the finance agreement. Our consultants diligently collaborate with our customers, engaging in negotiations with our lenders to secure a favorable and financially prudent outcome. While a balloon can effectively lower the monthly loan repayment amount, it is imperative to acknowledge that it necessitates eventual repayment. Although this settlement isn't due until the conclusion of the loan term, it's prudent to proactively consider strategies for settling the balloon well in advance. This foresight empowers the business to make well-informed decisions.
At Jade Truck Loans, we comprehensively address the manner in which we partner with business owners to optimize the balloon component. We offer an array of options to facilitate the eventual repayment at the culmination of the loan term, ensuring transparency and alignment with our clients' needs.
Balloon/Residual Explainer
First the terminology. So as not to confuse, a balloon relates to Chattel Mortgage for truck & trailer finance and Commercial Hire Purchase while residual is a similar concept but refers to truck leasing. For the purposes of simplicity we’ll refer to balloon in this article.
A balloon is a designated portion of the loan amount that remains reserved for settlement at the conclusion of the loan term. It can be structured as a fixed monetary value or, more commonly, it is represented as a percentage – such as 20% or 30%.
Why opt for a balloon? The inclusion of a balloon within the loan arrangement serves to curtail the segment of the loan sum used to compute the monthly repayments, thus effectively reducing the magnitude of each payment. Consequently, incorporating a balloon facilitates the customization of monthly payments in alignment with the business's cash flow. It's important to note that a balloon does indeed accrue interest.
Determining the optimal size of the balloon hinges on various factors. The lender's input in what they will approve carries weight in this matter. A primary consideration for borrowers often revolves around the prospective resale value. Given that the balloon falls due for payment at the culmination of the loan term, which for truck loans can extend up to 7 years, astute operators typically avoid setting a balloon amount that surpasses the vehicle's value. Such a strategic approach safeguards against potential repercussions on resale or trade-in prospects.
An easy way to see exactly how repayments impact truck loans is to head to our Truck Loan Calculator. Enter the loan amount, loan term and an amount for a balloon and note the repayment amount. Now change the balloon, up or down, and see how the repayment value changes.
Payout Time: Options
The balloon sum becomes payable in its entirety upon the conclusion of the truck loan term, subsequent to the completion of all scheduled monthly repayments. Despite the balloon being predetermined at the commencement of the agreement, borrowers are advised to reach out to their lender for a precise payout amount.
The avenues for settling the balloon amount encompass two primary choices: utilizing available cash or pursuing refinancing. Business operators often opt against using cash reserves for this purpose. Given the prevailing low lending rates, refinancing emerges as a markedly favoured alternative. This approach aligns with the inclination of most business proprietors, who are disinclined to deplete their cash resources and find the refinancing route more appealing, particularly when interest rates are currently at a favourable juncture.
Refinancing a Balloon
Truck refinancing involves establishing a new loan contract for the amount of the balloon. This is a separate from the original loan.
The refinanced loan of the balloon:--
- Can be a different type of finance to the original loan.
- Can be with the same or a different bank or lender.
- Subject to lender approval can include 100% of the balloon.
- May include a balloon/residual component.
- Essentially requires the same application process as normal truck loans.
Even where the truck was originally purchased and financed as a new vehicle, the refinanced loan would be on a used vehicle as the truck would be x years old. As such, the loan features, conditions and interest rate would be as applicable to a used vehicle.
While refinancing a balloon on an existing would not, as of our understanding, be eligible for the tax allowance of temporary full expensing and IAWO, the tax features and benefits applicable to the finance product can be realised.
Refinancing Loan Types
Jade Truck Loans offers the full portfolio of loan products for both the purchase of new trucks and for refinancing a balloon or residual.
These loans include:-
- Chattel
- Leasing
- Rent to Own
- Commercial Hire Purchase
The choice of loan type should be discussed with the business accountant to ensure the features and benefits suit the individual business.
For rough estimates on what repayments may be on refinancing the balloon for your truck loan, refer to our loan calculator.
Contact Jade Truck Loans on 1300 000 003 to discuss refinancing a truck loan balloon.
DISCLAIMER: THIS INFORMATION IS ISSUED PURELY FOR THE PURPOSE OF GENERAL INFORMATION PROVISION. IT IS NOT TO BE TAKEN AS THE ONLY SOURCE OF INFORMATION FOR BASING FINANCIAL DECISION-MAKING. THOSE REQUIRING FINANCIAL GUIDANCE AND ADVICE SHOULD CONSULT WITH THEIR FINANCIAL CONSULTANT OR ADVISOR. NO LIABILITY IS ACCEPTED FOR ANY MISREPRESENTATION OF POLICIES, DATA OR ERRORS IN THIS CONTENT.
