What are the possible scenarios that await you when you avail of a novated lease balloon payment?
In vehicle financing, novated leasing has become an increasingly popular choice for many employees and employers. However, a critical aspect often overlooked is the novated lease balloon payment – a large final payment at the end of the lease term that can potentially lead to financial strain if not properly managed.
A novated lease contract involves three parties: an employee, an employer, and a leasing company. The employer is a middleman responsible for making lease payments from the employee’s pre-tax salary to the lease company. However, one must remember that the employee ultimately holds the financial responsibility.
Balloon payments are designed to reduce the monthly lease payments by shifting a significant portion of the cost to the end of the lease term. Often, this payment can be as high as 50% of the vehicle’s purchase price. While this makes the novated lease more affordable short-term, it can lead to challenging circumstances under certain conditions.
Case Studies Highlighting Potential Pitfalls
John, a mid-level executive, opted for a novated lease for his new car, attracted by the lower monthly repayments. However, he overlooked the $15,000 balloon payment at the end of his three-year lease term. When the time came, John could not pay the hefty sum due to unforeseen medical expenses. It led to significant financial stress and the car’s repossession.
Another example is Sarah, a single mother. She chose a novated lease believing it to be a cost-effective way to own a car. Unfortunately, she lost her job a few months before her balloon payment was due. As the job market was tough, she struggled to find a new job in time to make the balloon payment, leading to her losing the vehicle.
How to Safeguard Against Balloon Payment Pitfalls
While these situations highlight the potential risks of balloon payments, novated leases can still be a viable financing option when handled correctly. Here are a few strategies to safeguard against balloon payment pitfalls.
Firstly, consider the affordability of the balloon payment before entering the lease agreement. Set aside a portion of your salary regularly to ensure you can afford the balloon payment when it’s due.
Secondly, if you wish to own the car at the end of the lease term, consider a residual payment lease. Unlike a balloon payment lease, a residual payment lease calculates the monthly repayments with the assumption that the car will be bought at the end of the lease term. It can result in higher monthly payments but a much smaller final payment.
Remember to factor in the possibility of unexpected life events like job loss or medical emergencies. Having an emergency fund can provide a financial safety net in such situations.
While novated lease balloon payment can provide affordable ways to finance a vehicle, individuals must understand the potential risks and safeguard themselves accordingly. As the adage goes, forewarned is forearmed.