14 Jul

To Have A Residual/Balloon Or Not…..

Car Finance- the way I like to finance my car.

As a small business owner, who operates as a company, I have to decide whether to have a balloon at all and/or how much of a balloon to have. Many clients like to own their vehicles at the end of the term or set a balloon that will comfortably be below the trade-in value of the car so they are not “upside down” at the end of the term.

Whilst this allows many clients to sleep well at night it has two effects. Clients are making higher payments and getting equity in their car, however it also means they are in effect investing in an asset which depreciates at 25% pa and they are reducing the amount of interest payable which for many incorporated small business clients is 100% tax deductible.

Personally I prefer to maximise the balloon and the term which minimises the payment but increases the interest payable and minimise the equity I have in my car.

 

Why would I do this?

Firstly: as I operate via a company and the interest charges are 100% tax deductible so I the net after tax cost of the debt is low. I also want to maximise my tax deductible debt and minimise the non tax deductible debt.

Secondly: I’m not particularly interested in getting equity in an asset like my car as it depreciates at 25% PA. I have better things to do with my money.

Thirdly: The lower monthly payment frees up my cash flow.  With the extra money, I can pay off my home loan quicker and reduce my non tax deductible debt or invest in a asset class that is appreciating in value, not depreciating at 25% pa as vehicles normally do.

 

Of course this reflects my circumstances and is my personal choice but it may not suit yours. You should always seek independent professional advice from your preferred adviser.

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