A Balloon Payment or Residual Value is a final amount/lump sum still owed to the bank or financing company at the end of a loan term. The reason why there is a lump sum remaining is because the borrower only repaid part of the principal of their loan over its term. The borrower reduces their monthly repayments in exchange for owing the bank a final large lump sum at the end of the loan agreement.
A Balloon Payment or Residual Value is often used to lower the monthly burden on car repayments or being able to afford a more expensive car.
Some examples :
A new car costs R 100.000,00 the interest rate is 10% and the period for finance is 36 months. The Balloon payment is R 20.000,00
The monthly repayments without balloon or residual value will be R 3226.72 outstanding amount after 36 Months R 0,00
The monthly repayments with balloon or residual value will be R 2748.04 outstanding amount after 36 Months R 20.000,00
The difference in monthly payments is R 478,68
In follow up articles we will go over the advantages and disadvantages of Balloon Payments
In the meantime make some calculations on our Balloon Payment Calculator