Business vehicle finance products include the option for a residual or balloon. These terms are essentially similar in concept but relate to different finance products. Regarding the two most popular forms of business vehicle finance - for Leasing the term used is the residual and for Chattel Mortgage, the term is a balloon. For purposes of simplicity, we will refer to it as a residual in this piece.
The residual is the percentage of the original amount of the loan which is due for payment in full when the finance term is finalised. That is when all the monthly payments have been made. So what happens when the residual is due? If the car buyer opted for a large residual or balloon when the original finance contract was established, the total due may be a significant amount.
At this point, or some time before the end of the finance term, business owners need to decide how they are going to pay out the residual and take ownership of the vehicle. Refinancing is a very widely used method to pay out the residual on a motor vehicle finance contract.
Jade Car Loans outlines the process involved and the loan options available for refinancing car loan residual payments with cheap interest rate motor vehicle finance.
Role of the Residual
As mentioned above, the residual is a part of the loan amount which is due to be paid out at the end of the loan term. A residual can be referred to as a percentage of the loan or as a set dollar amount. As we offer no deposit finance, the residual may be a percentage of the actual purchase price of the vehicle. The role of the residual is essentially to reduce the monthly finance repayments and hence make vehicles more affordable.
When negotiating a new motor vehicle finance deal, business operators are typically seeking a residual amount that will give them a workable and cost-effective monthly repayment amount. The amount of the residual affects the amount of the repayments. The larger the residual the lower the repayments and the smaller the residual the higher the repayments over the same finance term. Refer to our business car finance calculator to see how this works and could work for your vehicle finance.
Interest does apply to the residual and referring to ATO rulings around residuals is advisable also the impact on fringe benefits tax. Lenders may also have guidelines around the amount of a residual that they will approve. So the borrower does not always get their way on this point. As there are accounting issues involved, business owners are advised to consult with their accountants on the structure of new motor vehicle finance.
When all the monthly vehicle payments are finalised, the residual is due to be paid in full.
Refinancing Options
Many business owners will opt to refinance the residual or balloon rather than use existing funds to pay out the amount. With lending interest rates currently at very low levels due to the ATO keeping the cash rate steady at 0.1% for an extended period, this can be a very savvy decision.
When selecting to source a business car refinancing deal, our customers are assigned their own Jade consultant to source, negotiate and structure the finance deal to best meet the customer’s requirements.
Refinancing involves securing a new finance contract on the vehicle and as such the process follows the usual steps associated with sourcing car finance. While we’re referring to this process as ‘refinancing’ the residual, specifically the process involves sourcing and securing a new finance contract for the amount of the residual.
It is worth noting that even if the vehicle was originally purchased as new goods, as it is now so many years old, the vehicle would be considered as used goods in the refinancing contract. This may affect the interest rate offered as rates may vary with new and used goods.
The refinancing can be with the same or different lender from the original vehicle finance arrangement. Borrowers will need to contact their lender to get an exact figure for the residual pay which could then be the loan amount for the refinance deal.
Refinancing can be sought with the same or different finance product from the original contract.
The business motor vehicle loan products available for refinancing a residual are:-
- Chattel Mortgage
- Leasing
- Commercial Hire Purchase
The features and benefits of the finance product apply to initial loans and refinancing. However, based on our understanding of the ATO rulings, refinancing an existing asset does not appear to be eligible for temporary full expensing.
Other tax arrangements about each finance product regarding the tax deductibility of repayments for leasing and depreciation of the asset as a tax deduction with Chattel Mortgage would apply. Referring to the business accountant or financial advisor as to which finance product is most suitable for an individual business is highly recommended.
A balloon/residual can be included in the refinanced deal.
The interest rates vary across the finance product selection and those considering refinancing can receive estimated repayments by using our Compare Interest Rates calculator.
While Jade Car Loans responds swiftly to finance quotes and processing applications, business owners can be wise to not leave it until the last minute to consider their options for paying out a residual.
Contact Jade Car Loans on 1300 000 003 to discuss refinancing a motor vehicle residual.
DISCLAIMER: IN REGARD TO MISREPRESENTATIONS AND ERRORS CONTAINED IN THE MATERIAL AS PRESENTED, LIABILITY IS NOT ACCEPTED. THE DETAILS AND CONTENT IS PROVIDED FOR CAR BUYERS AND INDIVIDUALS AND BUSINESS SEEKING FINANCE PURELY AS GENERAL INFORMATION. THIS IS NOT PROVIDED AS THE ONLY SOURCE OF FINANCIAL INFORMATION. ANYONE THAT CONSIDERS THAT NEED FINANCIAL ADVICE ABOUT THEIR SPECIFIC REQUIREMENTS SHOULD SEEK THEIR OWN FINANCIAL ADVISOR.
