August 15, 2018

# What is a Car Loan Balloon Payment and How Does it Work?

Learn exactly what a car loan balloon payment is, why you might consider it and how it could affect the cost of your car loan.

## What is a balloon payment on a car loan?

A balloon payment or “residual value” is an agreed-upon lump sum that you will pay to your lender at the end of the car loan term. Effectively, the balloon amount builds over the period of the loan by diverting a portion of your interest payments into it, so that your monthly payments (from a cash perspective) are reduced. Balloons are usually a significant lump of your loan amount (eg. 30-50%), which is why they have the ability to reduce the amount of your monthly repayments in such a substantial way.

For example, if Daniel took out a \$30,000 car loan for 5 years at 6% interest and had a (30%) balloon of \$9,000, his monthly payments would be reduced from \$579.98 (no balloon) down to \$451.  At the end of his loan term, he would then have to pay the \$9,000 sum left over in full.

It’s important to remember that while car loan balloon payments are helpful because they reduce your monthly repayments, they do in effect charge you more in interest across the term of the loan. Looking at Daniel’s case a little closer, we see that with a 30% balloon, Daniel’s interest costs are \$1,260 more.

Cost of a \$30,000 5 Year Car Loan at 6% Interest Rate (Excl. fees)
30% Balloon No Balloon
Monthly Repayments \$450.99 \$579.98
Total Repayment after 5 years (Repayments + Balloon) \$36,059.40 \$34,798.80
Interest Costs \$6,059.40 \$4,798.80
Cost Difference +\$1,260.20

Source: Loans.com.au Car Loan Calculator.

## Why you might consider a car loan balloon payment

There are a number of reasons why someone might consider having a balloon payment on their car loan. The first is that the repayments are less per month when compared to a car loan with no balloon. This provides a lot more cash flexibility, particularly for people who may have other expenses to pay (or less income coming in) for the period of the loan. It can also have the added benefits of qualifying for a larger car loan amount.

A lot of people also consider car loan balloons because there is an option for them to trade in their car at the end of the term and use the proceeds to pay off the balloon. They can then apply for a new car loan to fund the purchasing of a replacement vehicle. This is quite common for business car loans.

## What is the process when the balloon payment is due?

The balloon payment must be made as a lump sum once the car loan has expired. There are typically a number of options available once the payment is due.

• If the borrower wants a new vehicle, they can sell the car and use the money to make the payment and finalise the loan. The borrower is then entitled to buy a replacement car and if they wish, apply for a new car loan to pay for the replacement vehicle. If the car is being traded in as a part of the payment for the new vehicle then the Balloon Payment can be included in this process.
• If the borrower wants to keep the vehicle, they can make the payment in cash, roll over or refinance the payment into another loan.

## Balloon payments in business car loans

Because of the flexibility of smaller monthly repayments and the opportunity to replace your car every three to five years, balloons are commonly found in car loans for business and commercial purposes. Reducing the monthly repayments on a car loan can help a business to manage its short-term cash flow more effectively, while the higher interest rate charges can be claimed as a tax deduction.

If you’re interested in taking out a car loan balloon payment for business purposes, it’s a good idea to consult a tax accountant or financial adviser to find out how it could benefit your business.

## The Savings Lesson

Having a balloon on your car loan will not save you money, because you will have to pay a higher amount of interest across the life of the loan. However, it will provide you with the great flexibility of lower monthly repayments. Remember though that while it will help you save on your outgoing expenses during the term of the loan, there’s a lump sum that needs to be paid at the end of the loan. Make sure to shop around for a low interest rate before making a purchase decision and calculate your possible monthly repayments in advance using a car loan repayment calculator.

# Top 10 Cheapest Cars in Australia at the Moment

For many, having a car is a necessity. Whether for work or family use, a car makes travelling more convenient. In cases such as travelling with an infant or young kids, or moving a lot of stuff to another area, public transportation may not be ideal and a car becomes a better option.

Nowadays, you will see a wide range of cars from almost 50 different car manufacturers. Obviously, there are so many types to choose from and finding the right one for you can be a challenge. To make the selection process easier, we’ve rounded up 10 of the cheapest cars in Australia at the moment.

### Suzuki Alto (\$11,790)

It may be small, but Suzuki Alto comes with a lot of features. With its 1.0-litre three-cylinder engine, you can expect 50kW of power and 90Nm of torque. It’s also one of the most fuel-efficient cars out in the market today, as it uses about 4.7L/100KM. It also includes Bluetooth, six airbags, central locking, and a multi-format six-speaker stereo. The downside? It can only accommodate four people.

### Mitsubishi Mirage (\$12,990)

Five-star ANCAP safety rating, three-cylinder engine that churns out 57kW of power and 100Nm of torque, fuel consumption of 4.6L/100KM, plus the standard inclusions of Bluetooth, eight airbags, a multi-format and user-friendly audio system – you really can’t go wrong with Mitsubishi Mirage. This compact vehicle is one of the most fuel-efficient new cars in the country, and it’s very affordable too! But wait – did we mention that it can seat five people?

### Nissan Micra (\$13,490)

If you’re looking for a new car that’s both affordable and fuel-efficient, you may want to consider Nissan Micra. Aside from the Bluetooth and eight airbags, it comes with keyless entry, electronic brake force distribution, and stability and traction control.

### Holden Barina (\$14,990)

This compact car continues to be one of the favorites of many Australians, and for good reasons. Holden Barina can seat five people and comes with the standard features. It has a five-star ANCAP safety rating and offers 85kW of power and 155Nm of torque with its 1.6-litre engine. The downside? Its fuel consumption is at 6.8L/100KM.

### Holden Barina Spark (\$12,490)

Catering to the younger market, Holden Barina Spark offers 59kW of power and 107Nm of torque, thanks to its 1.2-litre, four-cylinder engine. It may not have Bluetooth, but it comes with eight airbags for protection in case of a crash and central locking. It can accommodate five people.

### Cherry J3 (\$14,990)

It may be a newcomer in the cheap transportation category, but Chery J3 meets the requirements on power and affordability. With its 1.6-litre, four-cylinder engine, it can generate 93kW of power and 160Nm of torque. It’s also the largest car among the vehicles in this list.

### Honda Jazz (\$14,990)

This car is beautiful inside and out. From its 1.5-litre iVTEC four-cylinder engine generating 88kW of power and 145Nm of torque, fuel consumption of 6.2L/100KM, to flexible features like a touchscreen interface with a rear-view camera, and fold-down rear seats, it’s no wonder that Honda Jazz got a five-star ANCAP safety rating.

### Kia Rio (\$15,290)

This car comes with a higher price, but it excels in terms of fuel consumption which is at 5.7L/100KM. It also offers 79kW of power and 135Nm of torque. It also has a five-star ANCAP safety rating. However, it lacks features such as reverse camera, cruise control, and touchscreen interface. Also, its stereo only has four speakers, while you’ll find six in other cars.

### Volkswagen Up! (\$13,990)

Another popular addition to the micro-car segment is Volkswagen Up! It may be small but it certainly packs a punch. It has a five-star ANCAP safety rating, electronic diff lock with stability and traction control, and Crash Avoidance technology. While it can accommodate four people, it is known to offer one of the most enjoyable rides in its category.

### Toyota Yaris (\$14,990)

This five-seater car offers 63kW of power and 121Nm of torque, thanks to its 1.3-litre four-cylinder engine. It also has the standard features such as Bluetooth, voice recognition, trip computer, and nine airbags which help it earn a five-star ANCAP safety rating.

Got other things worth-considering when it comes to cheap transportation and cars in Australia? Share your ideas in the comment section.

https://www.finder.com.au/cheapest-cars

# How to Save Money on a Car Loan

Getting the best price on a car is equally as important as getting the best price on a credit deal. Before you go shopping for a car, shop around for credit so that you can find a loan that best suits your circumstances and your budget. The majority of credit providers will give you ‘in principle approval’ for a loan, this gives you an idea of exactly how much you are entitled to borrow; therefore, you are less likely to feel tempted to spend more than you can afford. Here are some tips to assist you in car loan comparison.

If you have multiple debts, you may want to consider consolidating them into one loan to save some money. One loan means one interest rate compared to the four, five or six you are currently paying. Once your debts are covered the remainder of the loan can be used to pay for your car.

You won’t save any money on a car loan if you have got bad credit. A low credit score means a high interest rate; therefore, before you go looking for a bad credit car loan, improve your credit rating so that you can get a better deal.

When you make a payment, round it up to the nearest hundred dollars. This way you will be able to pay the car off faster and you will save money on interest payments.

### Never skip a payment

Some car loans will allow you to skip a payment during holiday seasons so that you can free up extra money to do other things. Don’t take up the offer, all it means is that your loan is extended and you will end up paying more interest.

If you just so happen to come into some extra money, use a part of it to make additional payments on your loan. Whether it’s a work bonus, a tax refund or an inheritance cheque. The faster you can pay off your car loan the better.

Have any tips on how to save money on a car loan? We’d love to hear your comments.

# Ways to save money when buying a used car

Buying a used car, rather than a new one, is a great way to save money. As cars age the effect of depreciation decreases, so a used car will be losing less each year, compared with a new one.

However, used cars are still an expensive asset and any saving you make has the potential to be a significant amount of money. Here are five ways to save money when buying a used car.

### Be prepared

Research is vital for any important purchase. It serves two purposes; firstly, allows you to pick something that is right for your needs, and secondly, makes you look like a serious customer in the eyes of the seller.

Don’t head straight out to a car yard, or the salesperson will do what they do best, sell you something. If you need finance, sort out a pre-approval before you start looking for a car and compare car loans.

### Buy the car you need

Once you know what you want and need, look for a car the fits that purpose. Buying a car that is too big, powerful, fancy or unique will cost you more, compared with a regular sized, common car. It isn’t only the higher upfront price, but the ongoing costs that will hurt you in the long run.

### Be methodical

Make a checklist to take with you to each car you inspect. What you put on the checklist is up to you, but it should be the things that you really need. Fill in the checklist dispassionately. This will help temper your emotions should you happen to see the car of your dreams, which is, however, completely impractical.

### Be in control of the sale and yourself

You should try to look like a serious buyer who is ready to make a purchase, if given the right offer. Know what you are looking for and how much you willing to pay for it. Leave room in any offer you make for a bit of back and forward between you and the seller.

You need to be able to walk away from a deal that isn’t right, or perhaps wait for a seller to move to your price.

As much as the seller is trying to sell the car to you, sell yourself to the seller. Focus on things that make their life easier like quick sales, paying on the spot, and getting inspections done quickly.

### Calculate the costs

Cars are only part of the equation; there is registration, insurance, and repairs to consider. Before you commit to any car, have an independent, qualified mechanic check it out to see if it needs any work. Even if you think it looks alright, there could be thousands of dollars in maintenance due in the coming years, which you obviously don’t want to find out about after you have bought it.

With a little bit of patience and discipline you can save a decent amount on a used car. Just be sure to have the car check out so you aren’t left paying out any saving you make on fixing it up later.

Do you have any tips to save money when buying a used car? Comment below.

# What is a Car Loan in Australia

A car loan is a personal loan that you use to buy a car.

You borrow the money and then repay it within a set period called the “term”, which is usually less than five years.

If you buy from a car yard, the dealer might offer to arrange finance for you, but make sure you shop around as you might find a better car loan deal elsewhere such as online.

Process of compare car loans have some key features that you will need to consider.

These include whether you want a fixed or a variable rate loan and whether you want a loan that is secured against your car or one that is unsecured.

Another decision is whether you want to pay your loan off in equal installments or use a “balloon” with smaller installments but a large lump sum at the end.

Whatever you choose, make sure to research a variety of lenders because interest rates vary widely.