Equipment loan payouts are the amounts due at the end of a loan term – residuals, balloons, buybacks, or the full sum due when finalising a loan mid-term. End of term payments are a feature of asset acquisition credit facilities and are the responsibility of the borrower to finalise to take full ownership of the machinery or in order to on sale the asset.
While these payments are due at the end or midway through a finance term, planning for making the payments can actually start when applying for the original loan. We explain why and detail the options available to finalising loan payouts when they are due.
What are equipment loan payouts?
Equipment loan payouts are the amounts due on asset finance for the operator to finalise a loan completely. The term can have a slightly different interpretation depending on the timing. If finalising a loan at the end of the term the payout may be the balloon with Chattel Mortgage and Commercial Hire Purchase finance, the residual with a Leasing agreement, and a buyback with a Rent-to-Own loan.
A balloon amount can be negotiated with lenders when setting up the loan. A residual will be in line with the schedules for asset values as determined by the ATO. A buyback is negotiated between the business and the lender.
If a business looks to finalise a loan mid-way through the loan term, the payout will include all the amounts still owing – the monthly repayments, interest, balloons and residuals, as well as the fees charged by lenders for finalising a loan prior to the end of the term. This may occur if the asset is being resold or traded-in, or if the business is seeking to refinance the loan to achieve a more workable solution.
Refinancing End of Term Equipment Loan Payouts
Most businesses will have an amount to finalise at the end of their machinery loan term – a balloon, residual or a buyback. Where funds are not readily available to meet that payment, a very popular option is refinancing. This involves taking out a new finance arrangement to cover the total amount owed.
When refinancing end of term payments, loan rates, terms and conditions for used machinery finance apply. Lenders assess the asset for collateral suitability, and if acceptable, the business can select from CHP, Leasing, Chattel Mortgage or Rent-to-Own for the refinanced loan. If the lender deems the machinery unacceptable as finance security, the business may consider taking on an Unsecured Business Loan.
The objective of refinancing is to include the total amount due in the loan. All relevant tax benefits and other features, eg balloons, would apply to the new loan.
Finalising Equipment Loan Payments at Resale
Where a business decides to trade-in or sell an asset while the asset is still under finance, they will need to finalise all outstanding amounts before the resale/trade can be finalised, or concurrently. The amount involved would include the lender exit fees, interest, end of term payment and the remaining monthly repayments. Operators can contact their lender to obtain an exact payout figure.
When trading in the machine on a new model, a common practice is to have the trade-in value subtracted from the price of the new model. In this instance, the dealer typically asks what is owed on the machine prior and they may factor that into the trade value to cover any monies owed.
Instead of taking the traded value as a discount on the new price, the operator may request that amount be remitted to the lender to cover the payout. If insufficient, the operator needs to make up the balance. If selling a machine privately, the operator may use the funds received to make the payout.
Why Early Payout Planning is Advisable
In our intro we mentioned that operators can start planning their payout when they are applying for the original loan. With asset finance terms available for up to 7 years, that is quite some time before the due date. So why the need for early planning?
The ideal scenario at the end of a finance term, where a balloon or residual is due, is for the machine’s value to be in line with the amount due to finalise the loan. If more is outstanding than the machine is worth, the operator will need to find the funds to make the payment. Lenders may only approve refinancing to their assessed value of the asset. Leaving the operator out of pocket for the remainder due.
When taking on Chattel Mortgage and CHP, plan for the balloon to be in line with the projected asset value at the end of the term. While a larger balloon will reduce the monthly payments on the original loan, it may leave the operator with a larger amount to finance or finalise at the end of the term.
When taking on new machinery finance, your Jade broker will be working to structure a solution that best meets your current requirements and the end of term payout requirements.
To discuss your options for finalising equipment loan payouts, contact Jade Equipment Finance on 1300 000 003
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.
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