Fincar December 9, 2020 No Comments

When you have made the decision to either take out a lease or a commercial hire purchase, you are inevitably faced with the decision about the size of the end payment, known as the balloon payment or residual, and what impact it has on you now and in the future.

The impact should be quite obvious, however. After all, the higher the balloon payment, the lower your monthly payments will be. In contrast, the lower the  balloon payment, the higher the monthly payment will be.

 

How to set your minimum residual?

There are some guidelines provided by the ATO when it comes to calculating minimum residual values as a percentage of cost for leased cars, where the effective life is typically considered as 8 years.

According to TD 93/142, the methodology for determining the minimum residual value as a percentage of cost can be expressed as follows: Minimum residual value as a percentage of cost = 75% – [ (75% / Effective life ) x Term of the Lease ]

Another approach to take is to ask yourself how many kilometers you will be driving each year, irrespective of whether they are business kilometers or personal kilometres. You are trying to establish how many kilometres you will have travelled at the end of the lease, when the balloon payment is due, as a higher distance will decrease your residual. In a perfect world, the value of the car will be equal to the residual.

What it all means

The upside, however, is that if you have kept the kilometers down and looked after your car, there is a chance that your value will be more than the residual and you will come out with a profit. It might even be enough to put towards your next car. With that said, the opposite generally holds true, where the value of the car is less than the residual and hence, the need for a final payment to settle the debt.

The most rational approach is to be sensible and set as low a residual as possible, which will then give you a chance to sleep easy during the course of the loan. A car is a highly depreciating asset after all, so keep that in mind.

What you should remember is that if you can’t afford to service your car loan, be it through the course of the debt, or at the end, then look for something else that fits in your budget.

 

The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.