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Balloon Payments and Residual Values Explained

When instant gratification competes with good reason!

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What are the restrictions involved in balloon payment / residual value loans?

If you are considering taking out a vehicle loan with a balloon payment / residual value, there might be some limiting factors you need to know before you make your final decision. These are mostly applicable to non-ownership residuals / leasing, but make yourself familiar with these:

Mileage limits

Because a car’s mileage affects its resale value, balloon payment loans generally have an annual mileage limit, usually 15,000 to 25,000 kilometres per year. If the allowed mileage is exceeded, a cost-per-km penalty usually applies.

Condition limits

Make sure you are familiar with any possible restrictions to the normal wear and tear of the financed car. Any abnormal damage that could further decrease a vehicle’s resale value, would be subject to penalties. At the end of the loan term / lease, it will be inspected and you’ll have to pay for any damages. You will also not be able to modify or upgrade the car in anyway if you a non-ownership balloon payment / lease. These restrictions will not be applicable if you intend to purchase the vehicle.

Terminating the deal

The ability to get out of a balloon payment / residual value loan is more difficult than settling a normal vehicle loan. You might be responsible for more early termination charges stipulated on the contract. Make sure you understand the penalties applicable, if any.

Insurance

Comprehensive motor vehicle insurance is the only insurance that will be accepted with a balloon payment / residual loan.
Many car buyers are intrigued by finance deals that involve ‘balloon payments’ or ‘residual values’ because it could allow them to get finance for a car that they would otherwise not be able to afford. Balloon payments are not always the best solution for everyone. Do thorough research and carefully consider if a balloon payment is a wise choice for you.
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