What is EMI?
Equated Monthly Installment – EMI for short – is the amount payable every month to the bank or any other financial institution until the loan amount is fully paid off. It consists of the interest on loan as well as part of the principal amount to be repaid. The sum of principal amount and interest is divided by the tenure, i.e., number of months, in which the loan has to be repaid. This amount has to be paid monthly. The interest component of the EMI would be larger during the initial months and gradually reduce with each payment. The exact percentage allocated towards payment of the principal depends on the interest rate. Even though your monthly EMI payment won't change, the proportion of principal and interest components will change with time. With each successive payment, you'll pay more towards the principal and less in interest.
Car Loan Balloon Payments & Residual Values Explained
Balloon Payments & Residual Values
One of the important decisions faced when selecting a car loan is whether you wish to have a Residual Value or "Balloon Payment" on the loan, and, if so, how large you want it to be. The presence and size of a Residual Value/Balloon Payment affects the amount of your regular monthly repayments as well as the amount owing at the end of the loan.
A Residual Value/Balloon Payment can also be known as an RV, Residual Payment or simply Balloon. Read on to find out what a Residual Value/Balloon Payment is, how it affects your loan, and some of the factors you should consider when choosing a Residual Value/Balloon Payment.
What is a Residual Value/Balloon Payment?
A Residual Value or "Balloon Payment" is a lump sum owed to the financier at the end of a loan term after all regular monthly repayments have been made. This allows a borrower to repay only part of the principal of their loan over its term, reducing their monthly repayments in exchange for owing the financier a lump sum at the end of the loan term.
For example: A new car buyer borrows R100,000 over 5 years and elects to have a R25,000 (25%) Residual Value/Balloon Payment on their loan. Their monthly repayments will be lower than if they had no Residual Value/Balloon Payment, however they will still owe the financier R25,000 at the end of the 5 year loan.
The amount of a Residual Value/Balloon Payment may be represented as an absolute Rand value or a percentage of the borrowed amount. With the exception of leases, having a Residual/Balloon Payment on a car loan is optional.
The benefits of a Residual Value/Balloon Payment
The primary benefit of a Residual Value/Balloon Payment is that it reduces the size of the regular monthly repayments due throughout the term of a car loan.
This in turn can provide a range of additional benefits to the borrower, such as increasing affordability and maximum loan size, assisting with cash flow management, and more closely matching the repayment of the car loan's principal with the vehicle's value over time.
What happens when a Residual Value/Balloon Payment falls due?
Where a borrower has elected to add a Residual Value/Balloon Payment to their car loan, the Residual Value/Balloon Payment must be paid as a single lump sum at the end of the car loan's term.
However, there are generally a few options available when the Residual Value/Balloon Payment on a loan falls due:
- If the borrower wishes to keep their current vehicle they can pay the Residual Value/Balloon Payment and finalise the loan. The Residual Value/Balloon Payment can either be paid in cash, or, subject to approval, the borrower can refinance or "roll over" their Residual Value/Balloon Payment into a new loan (in essence, continuing their current loan to cover the Residual Value/Balloon Payment).
- If the borrower wishes to change cars they can sell their current vehicle and use the sale proceeds to pay the Residual Value/Balloon Payment and finalise their current loan. The borrower can then purchase a replacement vehicle, and, if desired, apply for a new car loan to fund the replacement vehicle's purchase. If the borrower's current vehicle is being traded-in as part of purchasing a replacement vehicle then payment of the Residual Value/Balloon Payment on the current car loan can usually be structured into the change-over process, simplifying the process for the borrower.