When embarking on new vehicle purchases, most operators will typically have two financial aspects in consideration: the upfront truck purchase price and the projected monthly truck finance repayment. While the truck purchase price is a fundamental component, the monthly repayment holds a distinct importance in various scenarios. This figure aligns closely with the operational cash flow, making it a key determinant of affordability. In essence, the monthly repayment serves as a tangible reflection of financial feasibility and compatibility with the existing cash flow dynamics.
With interest rates rising as a result of RBA decisions over the past 6 months, the pressure may be on to achieve a workable finance outcome, specifically, loan repayments.
Jade Truck Loans assists operates to achieve the preferred truck finance repayment amount or affordability through negotiating the structure of the loan including the balloon. Addressing how the finance is structured, addressing individual elements - loan term, balloon and loan amount, can be an effective strategy to achieve a cost-effective and affordable repayment level.
While lenders will have guidelines around what finance structure they will approve, the amount of the balloon in particular can be varied to great effect if approved. We explain the function of the finance balloon and the possibilities that buyers can consider in varying this element to achieve their target repayment amount.
Function of Finance Balloon
A finance balloon is an amount of the total finance requested, which is set aside for payment at the completion of the finance term. The concept is available for all asset acquisition finance products but with varying terms. Balloon relates to Chattel Mortgage For Truck & Trailer Finance while residual is the similar concept with Truck Leasing.
The balloon is usually represented by a percentage of the loan amount. That’s the amount requested not the total including interest. With the balloon deducted from the loan amount, the monthly repayments are calculated on that balance. The balloon is then due to be finalised after all the repayments are completed, at the conclusion of the loan term.
The decision to include a balloon in a Chattel Mortgage is an option. It is up to the borrower to decide if this is an effective approach for their business. The lender may also have input on the amount of a balloon that they will approve.
Your Jade Truck Loans consultant takes on that task to negotiate with our lenders to achieve as close as possible to the customer’s preference.
Utilising the Balloon
The key use of a balloon can be to achieve a monthly truck finance payment amount which is workable with the business cash flow. A larger balloon will result in a lower repayment and a smaller balloon a higher repayment.
But a balloon amount is subject to interest. Consideration should be given to balancing the achievement of that target repayment amount with a possible larger total interest payable on the loan.
Operators that have been planning truck purchases for some time, may have been delivered a curve ball with the RBA’s rate rise decisions. RBA Governor Lowe had indicated during 2021 that a rate rise was not expected until 2023/24. Coming in 2022 may have left some truck investment plans in limbo with the cash rate increases and resultant lender rate rises over the past few months.
Using the balloon strategically may be a solution to offsetting the higher rates now applicable and still achieve the preferred loan repayment.
To clearly illustrate how varying the finance balloon actually works, refer to our Loan Repayment Calculator. Enter the finance amount that is being required without deducting the balloon amount. The calculator will automatically adjust for this.
By keeping the finance term and the finance amount loan term constant and varying the balloon amount, it is easy to see how the monthly finance repayment estimate changes. Tip: the calculator device does not have a memory to store calculations. When using the calculator note the results calculated so you can make decision and advise your Jade consultant of your preferences.
Considerations
In addition to the bottom line figures, there are other considerations when deciding on a balloon amount:-
- A larger balloon may mean more interest is payable on the total finance product.
- Maintaining perspective around the timing when the balloon is payable and the value of the asset and/or resale value. Most operators will want to avoid a scenario where more may be owing than the vehicle is worth.
- The balloon is payable as a lump sum when due. Consideration should be given as to how this may be facilitated. We may be able to assist with financing the balloon when payment is due.
Pay-out Time
The balloon payment, which is settled at the conclusion of the finance term subsequent to the completion of all monthly payments, is a sum that is required to be paid in full. In this context, businesses have the option to either utilize available funds to fulfil this payment obligation or explore the possibility of acquiring a new loan via refinancing to cover the specified amount. To make an informed decision, it's advisable to Compare Truck Loans & Finance Options From Major Lenders, ensuring that the chosen approach aligns optimally with the financial strategy of the business.
When refinancing a truck finance balloon, keep in mind that the vehicle would by then be a number of years old, even if purchased new originally. As such, finance for used vehicles would apply.
When making an enquiry around finance, requesting a quote or making an application, operators can discuss all the options around the finance balloon with their Truck Loan Broker - Commercial Leasing.
Contact Jade Truck Loans on 1300 000 003 to discuss cost-effective truck finance structure.
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.
