What Is the Novated Lease Residual or Balloon, and What Happens Then?
The residual, also called the balloon payment, is the amount left to settle at the end of a novated lease because the regular deductions do not pay off the whole car. For a three-year car lease, the commonly used minimum residual is 46.88% of the vehicle’s original cost; on a $55,000 car that is about $25,784. At the end you can generally pay it, refinance it, or sell/trade the car and settle the financier.
Why is there a balloon payment?
A genuine finance lease leaves part of the vehicle’s value unpaid until the end of the term. The residual helps the lease comply with tax and finance rules and lowers the regular deduction compared with paying the whole vehicle price during the term. It is not a surprise fee: it should be displayed on the quote before you sign.
What are the choices at lease end?
If you want to keep the car, you can pay the residual, usually with after-tax money, or arrange finance for the residual. You can also sell or trade the vehicle and use the proceeds to settle the financier, or return the vehicle according to the lease contract. Ask the financier for the exact settlement process and fees before acting.
How should I judge a residual in a quote?
Check the residual percentage, dollar amount and term, then model a realistic end value. A lower residual can mean higher regular payments; a higher residual preserves cash flow but leaves a larger final balance. The right question is not ‘is the balloon high?’ but ‘does this structure suit how long I will keep the car and how I will settle it?’
Worked example: a $55,000 car on a three-year term
Using a 46.88% residual percentage, the end balance is approximately $25,784. If the car is worth $29,000 at lease end, selling it could leave about $3,216 before sale costs after settling the residual. If it is worth $22,000, you would need to fund the $3,784 shortfall to settle the lease. The market value is not guaranteed to equal the residual.
Common questions about this decision
Can I salary package the residual payment?
The residual is generally settled separately from the regular salary-packaged lease deductions and should be treated as an after-tax end-of-term obligation. Confirm the exact treatment with the financier and employer packaging provider.
What if the car is worth less than the residual?
You may need to fund the difference if you sell or trade it, unless your contract provides another protection. Model a conservative end value and keep a plan for the residual rather than assuming the car will cover it.
Which primary sources support this guide?
Tax treatment changes. For the underlying rules, check the current Australian Taxation Office material before acting: