What is residual value
A quick overview
Residual value is the amount still owed at the end of a finance term. It’s often used in vehicle and equipment finance to lower monthly repayments. It’s also called a balloon payment in relation to a loan.
Residual value is very common terms that trips people up but it’s actually pretty simple. If you’re financing a car, truck, trailer, or equipment, the residual is what’s left to pay at the end of the loan. By keeping a lump sum due at the end, your monthly repayments stay lower. In this guide, we’ll break it down and show how residuals work in the real world.
So what exactly does residual value mean?
Residual value is the final amount owed on an asset finance loan. It’s also known as a balloon payment (which is why people get so confused). When you take out a loan or lease, the lender agrees to keep a portion of the cost until the very end. You pay it as a lump sum after all your monthly repayments are done.
For example, if you’re financing a $50,000 vehicle with a $10,000 residual, you’ll pay down $40,000 during the term and pay the remaining $10,000 at the end. This setup lowers your ongoing repayments but gives you a decision to make later. Keep the asset and pay it out, refinance the residual, or sell the asset to cover it.
There’s no right answer on what you should do at the end of the term. It completely depends on your circumstances and goals.
Residual value in the context of asset finance in Australia
In Australia, residual values are common in chattel mortgages, finance leases, and commercial hire purchases. They help businesses keep cash flow steady by lowering repayments during the loan term. Most lenders will set a max residual based on the asset’s expected value at the end of the loan.
The ATO also provides guidelines for residual percentages if you’re using the asset for business. Brokers use residuals to structure deals that match your cash flow now, with flexibility later.
A sole trader in Queensland finances a $60k work ute, he needs this specific model because it fits his equipment. To keep repayments affordable, the broker structures the deal with a 20 percent residual value — $12,000 due at the end. After four years of use, the business has three options:
- Pay the $12,000 to keep the ute
- Refinance the amount
- Sell the vehicle and use the funds to cover it