Residual or sometimes referred to as balloon payment means that after the finance contract period, there is a lump sum payment to be made on the vehicle. Similar to a reverse deposit basically. So you’ll pay monthly installments for the contracted period. When that’s over, then you have to pay the residual amount. Residual is available when financing newer model vehicles – usually under 3 years of age.
The main benefit of residual payment is that it lowers your monthly premium. This in turn can provide a range of additional benefits to the borrower, such as increasing affordability and maximum loan size, assisting with cash flow management, and more closely matching the repayment of the car loan’s principal with the vehicle’s value over time.
Residual payments work well if you are frequently trading in or upgrading your vehicle. If you plan on keeping the vehicle over a long period – residual can cost you more in the long term and it would be advisable to buy a cheaper vehicle with more affordable monthly payments and pay off the entire car.
What happens when the residual payment is due?
First option: you deposit a lump sum of money into the financiers’ bank account. If you plan to exercise this option it will require discipline. You need to use the money saved on monthly installments, invest that into something. Then at the end of the contract period you will have the funds to do this lump sum payment.
Second option: you sell the car and use the proceeds to settle this payment. You can even trade in your car for a new one and in the process, the old contract is settled & a new contract is put in place. If you speak to an Auto1,2,3 sales executive, they can explain all of this and help you through the process.
Third option: you can keep your car and refinance the residual payment. Basically this means that a new finance contract is created to pay off the residual payment over a period of months at a much lower monthly installment amount.