Commercial vehicle loans play an essential role in the day-to-day operations of thousands of small businesses across Australia. For many businesses, they provide an ideal finance solution that makes it easier to manage existing lines of credit and monthly cash flow. But when applying for a commercial vehicle loan, should you consider a balloon payment? Are they a great way to reduce costs or something to be avoided?
Because there is a lot of confusion surrounding loan balloons, we’ve put together this comprehensive guide to help you understand the various pros and cons associated with a balloon payment car loan.
What is a Balloon Payment?
First of all, what is a balloon payment? It’s a single, larger payment due at the end of the loan term. In a traditional car loan, the total value of the loan principal and interest is divided up so that the monthly repayments will progressively repay the entire balance. Once you reach the end of the loan term, you don’t owe any more money. With a loan balloon, a predetermined sum will still be owed once you reach the end of the loan term.
For example, imagine you want to buy a commercial vehicle for $45,000. With a 5-year loan term and a fixed interest rate of 8.5%, your monthly repayments will be around $923 per month. If you were to opt for a 30% balloon (equal to $13,500), your repayments would drop to $741. However, that final 30% will still need to be paid once you reach the end of the loan term.
What are the Pros of Having a Balloon Payment?
There are some advantages of having a balloon car loan, such as:
- Lower Monthly Payments: Perhaps the biggest advantage of a balloon is that it could significantly reduce your monthly repayments, making it easier to manage the loan.
- Flexible Cash Flow: Because your monthly repayment commitments are reduced, you’ll have more flexibility in managing your cash flow.
- Potential Tax Benefits: There may be certain tax advantages to choosing a payment balloon for a commercial car loan.
What Are the Cons of a Balloon Payment Car Loan?
There are also some disadvantages to loan balloons, including:
- Higher Total Cost: With a balloon, the interest accrues on a larger final payment. As a result, you’ll end up paying more over time. For instance, in the above example of the $45,000 car loan, having a balloon would add almost $3,000 extra to the total interest paid.
- Budgeting Issues: Paying a lump sum balloon at the end of the loan term can disrupt business cash flow and cause budgeting issues.
- Risk of Refinancing: If you’re not able to make a lump sum payment at the end of the loan, you’ll need to refinance the balloon. If the economy or your financial situation has changed, you run the risk of refinancing with less favourable terms.
What to Consider When Applying for Commercial Vehicle Loans
How can you determine whether a commercial loan with a final balloon is the right choice for your business?
- Business Needs: Weigh up the benefits of lower repayments against the potential risks of having a balloon.
- Financial Planning: Engage in some detailed financial planning to consider how a balloon will impact your future cash flow.
- Get Expert Advice: Talk to an experienced finance broker to see whether an alternative loan structure might be a better fit for your business.
Is a Balloon Payment the Right Decision? Ask Muscle Money!
Ultimately, the decision to include a payment balloon in your commercial car loan should be based on the needs and structure of your business. While balloons can be beneficial for some borrowers, others may find that the higher costs outweigh the benefits.
Are you considering a commercial vehicle loan with a balloon attached? Your next step should be to get some expert advice. Contact Muscle Money today and let us help you find the best commercial car loan to suit your business needs.
Caleb Waye-Harris, Senior Manager of Asset Finance at Muscle Money, has almost 15 years of relevant experience in the finance industry. His extensive background includes project management, consumer and commercial lending and asset-based lending.
