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Chattel Mortgage Balloons Explained

If you are financing a car with a chattel mortgage you may choose a balloon structure rather than paying down the loan to zero.

What is a balloon structure?

At the end of the term of the chattel mortgage (12 to 60 months) you can opt for a balloon which is a lump sum due at the end of the financing term.

As an example, lets assume you are purchasing a new Toyota Hilux SR5 ute which has a drive away price of $60,000.  Below are examples of the monthly repayments of financing with and without a balloon over a 4-year term assuming an interest rate of 7%:

  • No balloon – $1,478
  • 40% balloon – $1,002

So, the balloon structure reduces your monthly repayments by $476 or $22,848 lower repayments over the 4-year term.

If I choose a balloon structure what do I do at the end of the financing term?

At the end of the term of the chattel mortgage you have the following options:

  • Payout the balloon and there is nothing owing on the vehicle
  • Refinance the balloon to pay it down to zero (subject to approval by the financier)
  • Sell the vehicle privately and pay the balloon off with the proceeds
  • Trade the vehicle in and the dealer will pay off the balloon

Is balloon structuring a smarter way to finance a business vehicle?

Yes.  Cash flow is important for a business and using a sensible balloon structure for the vehicle financing will ensure you keep the repayments lower and at the end of the term you have options to quit the vehicle or refinance.

What is a sensible balloon for a chattel mortgage?

The answer is found in the term of the chattel mortgage and the vehicles historical trade in valuation.

As an example:

  • 4-year term – financier maximum is 40%
  • 4-year old of the same make and model trade-in value is 45%
  • Therefore a 40% balloon is probably a sensible balloon structure for a 4-year term

Ultimately the value of your vehicle at the end of the term is heavily dependent upon:

  • Make and model – market perception of it being a good vehicle
  • Kilometres travelled over the finance term
  • Maintenance history
  • Damage to the vehicle

If your vehicle has higher kilometre usage and is working in tough conditions, then it is prudent to choose a lower balloon to avoid a gap between its balloon payout and market value at the end of the chattel mortgage term.

Check out our article Top 5 tips to beat depreciation on your car