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Car Loans with Residual
January 14, 2021● 4 minute read●
Transportation is one of the necessities of the human species, especially in our modern-day civilization. The quest for making access to transport is a never-ending one. An array of car loans are available for the convenience of the masses. We will be delving into car loans with residuals in this article. Car loans with residual are yet another variety of car loans displaying themselves as an option of the common man. We sometimes refer to residual payments as balloon payments; this payment method presents people with both benefits and challenges.
What is a residual payment?
A residual payment, otherwise known as a balloon payment, is an accumulated sum of money you pay after a loan. Regular payments (monthly, fortnightly, or weekly) need to be made, just like any other loan. The difference between a standard car loan and one with a residual is that there will be no leftover payment at the end of the loan in a traditional car loan. Typically, you owe nothing after making all your periodic payments. When the loan is accompanied by a residual, you still owe an agreed-upon amount. Under the residual charge, the monthly payments are made cheaper. People usually opt for a residual because of the more affordable instalment payments, even though it comes down to paying more overall. The amount set as residual differs according to the lender and the terms and conditions of the loan.
Why opt for a car loan with residual?
You might be wondering why anyone would want to choose a residual payment option that involves paying a substantial fee at the end of the duration. Well, as mentioned earlier, the regular payments decrease. Part of what you would have had to pay for a standard car loan will roll over to constitute part of the final settlement. The reduction in payment makes it more comfortable for people who do not earn very high to afford it. Having to dish out a little less money every month (or week or fortnight) improves your cash flow. Many borrowers who opt for this system do so for this single reason. Having the vehicle becomes more affordable allows for the borrower to apply for a larger loan and, by extension, a better car. People like the idea of better. After all, why would anyone go for good when you can have better?
Disadvantages of car loans with residual
A residual does sound pretty appealing, but you need to get the full scope before committing to anything. On the grand scale, residual car loans can end up being costly than a car loan without a residual. A residual could boost the interest rate of the loan, leading to additional charges at the end. Most people who end up applying for a residual would still prefer to have cheaper payments than that implies higher costs at the finish line.
Another problem involved with residual with your car loan is the possibility of not having the capacity or capability to afford the residual amount. Having the pay a collected sum of money before gaining total ownership of the vehicle might prove difficult for some people. The loan’s cost and the amount of time the loan lasts for determines the charges needed to pay at the end. The residual fee is directly proportional to the loan cost and inversely proportional to the time. That means that the higher the loan, the higher the residual price, and the higher the time, the lower the residual fee will be.
Additionally, your problems might increase because cars depreciate with time. The depreciation of cars could imply that the vehicle’s worth would not be high enough to take care of the residual payment if you have to sell the car to pay off the loan. Therefore, money lenders try to be a bit flexible in an attempt to make up for the fluctuations of the market.
Options available for inability to cover the final payment
If the borrower is unable to complete the payments for the loan, there are a few paths that one can take to avoid having a total disaster on their hands.
Some lenders may provide an option for the loan to be refinanced. A refinanced residual or balloon payment supplies you with the opportunity to increase your payment margin and enable you more time to pay up. Having your loan terms and conditions revisited, if possible, is most likely the first option to be looked into getting.
The money you can get from selling the car could help pay for the final instalment. The best-case scenario would be for the profit to exceed the residual payment. If the earnings do happen to cover the car payment, then you would be off the hook. Whereas, if the car’s profit has fallen due to unexpected depreciation, you will have to look for the rest of the money required. Unless the vehicle has depreciated too severely, making up for the amount not covered by the car’s sale should not be excruciatingly painful.
You might also consider getting a personal loan from family and friends, especially if the residual is not very high. Taking out another loan from the bank might even be possible but taking out a loan to pay another loan usually does not end up being the right solution as getting caught up in a vicious circle of loans is feasible.
Whether to get a residual to follow a car loan is a personal one and pays some more than others. An in-depth analysis of one’s finances and income is essential. Also, keeping track of the car’s value while under the loan is advisable to afford the residual at the end of the day. Generally, residuals might pay businesses more than an individual car user to keep up with the enterprise’s monthly car flow. At the end of it all, it all depends on each person’s or business’ personal and distinctive financial situation.
Written by Jacaranda Team