Car finance: what happens at the end of a PCP deal?

  • Choose to return car, buy it outright or trade it in
  • Make optional final payment to take ownership
  • Look after car if you plan to return it to avoid charges
  • Choose to return car, buy it outright or trade it in
  • Make optional final payment to take ownership
  • Look after car if you plan to return it to avoid charges

When you signed on the dotted line several years ago, the end of your PCP finance contract might have seemed like a lifetime away. However, after a few years enjoying your new car, it’s quickly time to consider your options again – as you don’t automatically own it.

With PCP you have three choices when the contract ends; make the optional final payment to buy the car, return the keys and walk away with nothing left to pay – provided the car is in good condition and below the pre-agreed mileage limit – or hand it back and get a new one.

Keep reading to find out which option best suits your needs and to check how you can avoid being hit with hefty end-of-contract charges. Meanwhile, if you’re in the market for a new car, take a look at this week’s best finance offers on our Deal Watch page and check out the most appealing cars available for your budget, by clicking on the links below.

1. Buy the car

If you’ve fallen in love with your car, with PCP finance you can make the optional final payment (also known as the Guaranteed Future Value (GFV) or Balloon Payment) at the end of the contract and take ownership. Pay this and the car is all yours.

If you don’t have enough cash to hand to make that payment, you could always set up a loan at this stage – through the manufacturer or a bank – and own the car outright once all the payments have been made. Visit our finance calculator to find out how much you can afford to borrow.

Incidentally, should the car be worth more than the optional final payment written in the contract, you can always buy the car, sell it on and make a little profit. You can then put this towards a deposit on another finance scheme or put it into buying a cheaper used car.

Remember, though, that you can take advantage of any equity – where the car is worth more than what’s left to pay to buy it outright – by handing it back to the manufacturer and taking out another PCP contract – as with option three below.

Best of all, you can do this with a manufacturer or dealer other than where you purchased the car; the dealership simply buys the car from the finance company and sells it on and you can step straight into a new car.

2. Return the car to the manufacturer

If you’re not set on keeping the car you can simply hand it back to the company and you should have nothing left to pay. That’s provided you’ve made all the monthly payments due, kept to mileage limits, haven’t damaged the car (beyond fair wear and tear) and have serviced the vehicle as specified in your finance agreement.

Break any of these conditions and you can expect to incur additional charges. However, if you have damaged the car, be aware that you can always get a quote from the manufacturer to fix it and compare the cost with a quote from a garage you trust – as getting the car fixed elsewhere could cost you less.

If you’ve kept the car in good nick, though, you can just hand the keys back and look for a new car elsewhere. Do bear in mind that you walk away with no capital, as you will have effectively rented the car for the contract term if you do this. This means that if you still need a car, you’ll have to find cash for this or set up a new finance scheme elsewhere.

3. Trade in the car for a new one

This is the option manufacturers will be most keen for you to take as they get repeat business – and any equity (where the car is worth more than the remaining payments) left in the car is yours to put towards the deposit on a new finance scheme, cutting your future monthly payments.

You’ll want to remember, though, that the value of the car could also be less than expected depending on how used car values have changed during the contract. This may mean that you have little or no equity left to put towards your next car – and the bigger cash deposit you have in addition to this, the lower your monthly payments will be.

Meanwhile, if you’ve exceeded the agreed mileage limit or have returned the car with damage you could face additional charges, which could leave you out of pocket. As a result, it’s important that you’re not financially depending on equity being left in the car at the end of the agreement – and you know how many miles you can cover to sidestep additional charges.

PCP finance: wear and tear and mileage limits

Go over the agreed mileage limit and you are liable to be charged for every additional mile you’ve covered. While some companies charge as little as 3p per mile, others will demand up to 30p per mile, if not more. A rate of 30p per mile means that even chalking up an extra 1,000 miles each year could cost you £900 over three years, so think carefully before signing up to a low-mileage contract.

If you do think you’re going to cover more miles than agreed, it’s worth negotiating a higher mileage cap with the manufacturer – before you get to the end of the contract. This is likely to cost you less than being hit with fines when you hand the car back.

Your paperwork is likely to specify how often you need to service the car and the condition it must be in when you return it. Fail to service the car on time – or at all – and you can expect to be stung with additional fees, as this has a direct impact on the value of the car. Anything beyond 'fair wear and tear' may also incur a penalty to put right.

Don’t forget, however, that if you’re happy with the car you can always make the optional final payment to take ownership – and not be liable for any excess mileage, damage, or missed servicing charges. Remember, too, that these factors are likely to reduce the value of the car if you plan to sell it and are expecting to get a certain price.

Dealers encouraging you to get a new finance deal

Manufacturers will often get in touch well before the end of your contract to try to entice you into a new contract. Though some of these offers might seem appealing, remember that the dealer is looking to make a sale.

Even if the monthly payments are the same, often you’ll have to put down a hefty deposit or end up paying more interest on a longer contract – significantly increasing the total amount payable compared with sticking to your current car. Also be aware that other manufacturers may have even better deals – so it pays to shop around.

It’s likely that if you do trade up early the dealer will push you towards Voluntary Termination (VT). This right lets you end a PCP contract early by handing the car back partway through the contract – as long as you’ve paid more than 50% of the total balance due (including interest and charges) or make up the difference.

While this shouldn’t affect your credit score, it will be noted on your credit file and if you’ve used VT numerous times, finance companies may be hesistant to lend to you again, as this process can cause additional expense for them.

Much harder to end a PCH leasing contract early

When looking at new finance schemes, be sure whether you’re looking at PCP or PCH leasing contracts – as there are different rules surrounding returning a car.

While you can return a car in the middle of a PCP contract, it’s much more difficult – and can be far pricier to do this – with PCH leasing.

Want to find out more about car finance? Take a look at the links below:

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