It is possible to structure your vehicle financing with a balloon or residual payment. This results in lower monthly payments making the agreement appear more affordable however you end up paying more over the long run as the residual / balloon payment needs to be made at the end of the contract.
One of the risks is the possibility that the balloon / residual payment can be higher that the market value of the vehicle at the end of the contract period.
The difference between a residual and a balloon payment contract relates to where the risk for the outstanding payment lies at the end of the finance agreement period.
A balloon payment is an inflated installment that falls due at the end of the credit agreement, it is also be referred to as a bullet payment.
The balloon amount is based on the projected market value of the vehicle and is influenced by the length of the credit agreement, i.e. (i.e.36, 48 or 60 months), and by the resale value of the vehicle being financed. The risk associated with a bullet payment is carried by the customer, you are liable for the full balloon payment in the final month of the contract and this forms part of the payment stream. Balloon payments can form part of any Installment Sale and Rental Agreement
Ideally you want trade in the vehicle and use the cash obtained to settle the balloon payment and still have enough cash left over to provide a deposit. Another option is to keep the vehicle and most financing institutions will allow you to finance the bullet payment.
Residual value are associated with rental agreements. The risk associated with a residual value payment is carried by the financial institution. Financial institutions typically would therefore place certain restrictions on the mileage of the vehicle and may impose penalties on high mileage users.
At the end of the rental period you return the vehicle to the finance company who have the responsibility of selling the vehicle and benefit from any profit or loss on the sale of the vehicle.
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