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What is the balloon actually costing you?
Almost every vehicle and plant facility is quoted with a balloon, and it is always sold on the lower payment. The lower payment is real. So is the sum still owing at the end, and the extra interest you pay for the privilege of deferring it. This shows both halves of the trade.
Equipment finance
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
A lower payment, and a bill in the final month.
The payment falls because part of the debt is not being repaid. That part is still there at the end, due in one sum, against an asset that will be several years older by then.
Monthly payment
$9,437
Owing in the final month
$137,500
What it saves you
$1,847
a month, 16.4% less than the $11,284 it would be without one.
What it costs you
$26,676
more in total across the term, because the deferred money keeps earning interest for the financier.
Both of those are true at once. Whether the trade is worth taking depends on what the asset will be worth when the balloon falls due, and on whether you would rather have the cash now than later.
In arrears
$9,437
Paid at the end of each month.
In advance
$9,371
Paid at the start. Same facility.
Total interest
$153,722
Across the whole term.
- Total paid, with the balloon
- $703,722
- Total paid, without one
- $677,046
- The balloon costs you
- $26,676
- Monthly saving
- $1,847 (16.4%)
- A balloon is not a discount. It lowers the payment and raises the total, and the amount above falls due in one sum at the end of the term. If the asset is worth less than that by then, the difference comes out of your pocket or gets refinanced at whatever rate is available on the day.
Indicative only, on the figures you entered. Residual levels a lender or the ATO will accept vary by asset and term and are not shown here. Not credit advice and not an offer of finance.
The method
Discount the balloon, amortise the rest.
Standard amortisation with one change: part of the debt is not being repaid, so it is taken out of the calculation and added back at the end.
| Line | How it is worked out | Why it matters |
|---|---|---|
| The payment | The balloon is discounted back to today, then what is left of the principal is amortised across the term. | It is why a balloon lowers the payment: you are only repaying part of the debt. |
| In advance or in arrears | Paying at the start of each period rather than the end divides the payment by one plus the monthly rate. | The most common reason two quotes on identical terms do not match. Quotes rarely say which way they are struck. |
| The rate convention | The annual rate divided by twelve, not a compounded twelfth root. | It is how these facilities are actually quoted, so the figure matches the paperwork. |
| The total | Every payment, plus the balloon, plus the establishment fee. | The number a balloon is never sold with. It is always higher than the same facility without one. |
The payment
- How it is worked out
- The balloon is discounted back to today, then what is left of the principal is amortised across the term.
- Why it matters
- It is why a balloon lowers the payment: you are only repaying part of the debt.
In advance or in arrears
- How it is worked out
- Paying at the start of each period rather than the end divides the payment by one plus the monthly rate.
- Why it matters
- The most common reason two quotes on identical terms do not match. Quotes rarely say which way they are struck.
The rate convention
- How it is worked out
- The annual rate divided by twelve, not a compounded twelfth root.
- Why it matters
- It is how these facilities are actually quoted, so the figure matches the paperwork.
The total
- How it is worked out
- Every payment, plus the balloon, plus the establishment fee.
- Why it matters
- The number a balloon is never sold with. It is always higher than the same facility without one.
A worked example
A forty per cent residual, and what it buys.
$180,000 over 48 months at 9.25%, with 40% left owing at the end.
Most of this facility is still owing when the term ends.
At this level the payments barely touch the debt. That is ordinary on an operating lease, where the financier carries the risk on what the asset is worth. On a chattel mortgage you carry it, and the gap between the balloon and the resale value is yours to find.
Monthly payment
$3,255
Owing in the final month
$72,000
What it saves you
$1,245
a month, 27.7% less than the $4,501 it would be without one.
What it costs you
$12,226
more in total across the term, because the deferred money keeps earning interest for the financier.
Both of those are true at once. Whether the trade is worth taking depends on what the asset will be worth when the balloon falls due, and on whether you would rather have the cash now than later.
Total paid
$228,755
Payments, balloon and fee.
Total interest
$48,260
Across the term.
The payment falls by $1,245 a month, which is 27.7%. That is the number on the quote, and it is genuine.
What is not on the quote is $12,226 of additional total cost, and $72,000 falling due in a single month four years from now, against a machine that will be four years older.
Neither of those makes the balloon wrong. Cash flow now genuinely is worth something. They just both need to be on the table when you decide.
What this does not cover
- What residual a financier or the tax rules will actually allow for your asset and term
- Break costs or the payout figure if you exit early
- Weekly, fortnightly or quarterly payment frequencies
- GST treatment and input tax credits, which differ by structure and belong with your accountant
- Whether the asset will be worth the balloon when the balloon falls due
Weighing this against another offer?
Compare two structures properly rather than on their rates, or model the whole debt position at once with the Debt Capacity Assessment. $1,850, 5 business days.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nicholas handles it himself.
Common questions
It depends entirely on what the asset is worth when the balloon falls due, and that is a guess at the point you sign. A balloon lowers the payment and raises the total, because the deferred money keeps earning interest for the financier the whole time. Where it works is on an asset that holds value well and on a business that genuinely needs the cash flow now. Where it hurts is on a fast-depreciating asset, because you can reach the end of the term owing more than the thing is worth.
Usually because one is quoted in advance and the other in arrears. Paying at the start of each month rather than the end makes every payment a month earlier, so the payment falls by exactly one period's interest. Nothing about the deal has changed. Always ask which way a quote is struck before comparing it to another.
That is set by the financier and, for some structures, constrained by tax rules on the minimum and maximum for a given term. We deliberately do not publish a schedule here: those levels change and getting one wrong on a website would be worse than not having it. What we can say is what is commonly seen, which is roughly 25% on a five-year chattel mortgage, a minimum around 20% on a finance lease, and 40% to 50% on an operating lease where the financier carries the risk rather than you.
Not in this calculator. It is included in the total cost but not amortised into the monthly figure, because most equipment facilities charge it separately at settlement. If your quote capitalises the fee into the amount financed, add it to the amount financed instead and leave the fee field at zero.
No, and it is not credit advice or an offer of finance. It is the amortisation arithmetic on the figures you entered. What a financier will actually offer depends on the asset, the security, your position and their appetite on the day.
General information only. Not credit advice, not a credit assessment, and not an offer of finance. Andorra Advisory Group does not arrange credit and is not a credit representative. Residual conventions shown are levels commonly seen, not any lender's policy and not tax guidance.