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Explained: Residual Value or a Balloon Payment

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A quick guide to residual value and balloon payments

Put simply, a residual value and a balloon payment are the same. Both refer to a pre-agreed payment due at the end of a loan for a vehicle or machine.

If the loan facility was a finance lease, then the amount at the end of the lease is called a residual.

If the loan facility was a chattel mortgage, then the end-of-term payment is known as a balloon payment.

Example of a balloon payment based on residual value

A $50,000 vehicle is financed over five years with a 30% ($15,000) residual value.

This means $35,000 is paid off over the five-year term of the loan, with the remaining $15,000 paid out as a balloon payment at the end.

The balloon can also be refinanced over a second term, typically two to three years

for a motor vehicle. This can be extended up to five years for items with a higher residual value.

Looking to learn more?

Find out how balloon payments and residual values work in equipment finance by reading about chattel mortgages.

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