What is PCP car finance? – Optional final payments are part of the Personal Contract Purchase (PCP) car finance process, so you might want to opt for a Hire Purchase (HP) agreement if that’s something you want to avoid. PCP car finance allows you to pay the depreciation amount of your car on a monthly basis, with the option to hand back your car at the end of the contract or pay that optional final payment to become the legal owner.
Over the course of the agreement, you’ll pay the difference between the current value of the car and the predicted value of your car at the end of your contract. The final payment will cover the full balance of the vehicle so you can become the owner. These contracts come with guidelines for things like mileage and the condition of the car.
You’ll need to stay within the mileage allowance stated in your contract to avoid extra fees, and keep the car well maintained,
What should I do at the end of my PCP?
Nine out of 10 new cars are purchased through car finance, as are hundreds of thousands of used and nearly new models each year. As well as offering lower monthly payments than Hire Purchase or a traditional bank loan, PCP finance gives you several options at the end of the contract – letting you purchase the car for a pre-agreed amount, hand it back or trade it in for a new one.
- These options may seem bewildering when you’re nearing the end of the contract, though.
- Are you better off returning the car and walking away or paying to keep it? Should you trade in the car or refinance? And how do you avoid damage and mileage charges if you do hand the car back? Fear not; think about them ahead of time and there’s no need to stress.
Finance companies will typically contact you at least a month before your final payment is due, to remind you that the contract is coming to an end and to set out your options. They may even contact you up to six months or so ahead, if the car is worth more than the optional final payment – which is known as having equity – as this would mean that you could step into a new car at that stage without having to pay anything extra to settle your current contract.
- I want to keep the car You’ll need to pay an additional lump sum, known as the optional final payment, which was agreed at the beginning of the term. This often amounts to anywhere between a third and half of the car’s value at the start of the contract, depending upon the model and contract length. This can be refinanced. More details
- I want a different car PCP gives you the option to return the car to the lender at the end of the term. It will be checked and collected and you’re likely to be charged for any damage beyond fair wear and tear and any excess mileage over the pre-agreed mileage limit. It’s possible to trade in the car for a new one with many retailers, too. If a retailer deems the car worth more than the optional final payment, there will be a surplus that you can put towards the deposit on your next car, reducing future monthly payments. More details
- I don’t need another car Return the car to the lender and you’ll have no more monthly payments to make, although charges for damage and exceeding the pre-agreed mileage limit may be issued. If the car is worth more than the optional final payment, you will probably be better off making that payment to buy it and then selling it privately or, with the agreement of your lender, selling to a car retailer who will settle the outstanding finance and pay you the additional amount. This way the extra value in the car over the remaining finance balance ends up in your pocket, rather than going back to the finance company. More details
Video of PCP finance: What is Personal Contract Purchase?
What happens to equity at end of PCP?
Option 3 – Use any equity in the car to fund your next finance deal – 
Your final option is to put any positive equity that has built up in the car over your agreement towards your next finance deal. Positive equity is generated if the car is worth more than the balloon payment when the deal comes to an end – sometimes referred to as the guaranteed future value (GFV).
- With the recent increases in car prices across the board, some finance buyers are finding that their vehicles are now worth slightly more than expected.
- This cash can be used to help fund the deposit on your next PCP, or to bring your monthly repayments down.
- You can take out your next finance deal with a different company than the one that provides your existing deal, and you don’t have to choose the same brand of vehicle, either.
The company arranging your new finance agreement will establish the details of your existing contract, settle any remaining payments with the outgoing provider and, if there is any equity left over, allow you to put it towards your next finance agreement.
How much is final payment on PCP?
Go for a PCP finance deal and you’re likely to see the term ‘optional final payment’ on the paperwork. Or perhaps ‘guaranteed future value’ or maybe ‘ balloon payment ‘. These terms might sound baffling, but they mean the same thing. This amount is essentially what the car is predicted to be worth at the end of the finance contract.
So, why is it important? Well, since monthly payments on a PCP finance deal effectively cover the difference between the car’s value at the start of the contract and its expected value when the contract ends – represented by the optional final payment – the size of this balloon payment fundamentally shapes how much you pay every month.
It also determines what you’d have to pay when the contract ends if you wanted to buy the car. Unlike traditional car loans or Hire Purchase schemes – where you pay the whole cost of a car, plus interest, split across a deposit and a series of monthly instalments (owning it once you’ve made the last monthly payment), with PCP finance you don’t own the car once you’ve made all the monthly payments – these only cover part of the cost of the car.
- Your monthly bills cover the difference between the car’s initial cash price and the guaranteed minimum future value as set out by the finance company before you enter into the contract – then you have to make this optional final payment if you want to buy the car.
- The higher the optional final payment is, the lower your monthly payments.
Similarly, the lower the optional final payment, the more you have to pay every month. A car that is desirable second-hand – and is consequently worth more at the end of the contract – may have an optional final payment of around 50% of its original price on a three-year contract, while one that loses value quickly may have an equivalent figure of just 30%.
- A high optional final payment is good news if you plan to run the car for the length of the contract and then hand the keys back, as you’ll pay less every month.
- Remember, though, that if you want to buy the car at the end of the contract, you’ll need to be able to find enough money to pay this.
- You can also consider refinancing the balloon payment to make owning the car more manageable.
So, while a car that retains much of its value is more affordable in monthly payment terms on PCP, it’s more expensive to buy at the end of the contract, as you’ll need to make the optional final payment then – or refinance this – to take ownership. Meanwhile, a car that loses value quickly is likely to have a low optional final payment.
