What are your options at the end of a PCP?

Car finance advice

Car dealers and finance companies love selling personal contract purchase (PCP) car finance, and they love telling customers about how “flexible” it is, with an array of wonderful “options” to choose from at the end of a PCP.

A PCP consists of regular monthly payments (typically 36 or 48), followed by a large final payment, often called a balloon payment.

It’s important to understand that you generally have to make a decision of what you would like to do after your last monthly payment but before the final payment is due.

These are the three options for dealing with the final payment at the end of a PCP agreement:

  1. You pay the finance company the final payment and keep the car
  2. You give the car back under the terms of the guaranteed future value (GFV)
  3. You part-exchange the car at a dealership, who pays off the final payment for you

Understanding the final payment

The final balloon payment at the end of a PCP is often also called the guaranteed future value (GFV), which is technically a different thing but it doesn’t matter for now. Many finance companies humorously describe it as the “optional final payment”, making it sound like you don’t have to pay it unless you want to. The reality is the exact opposite, and it can have disastrous consequences for your personal finances.

What is very important, and generally not explained by car dealers, is that paying off the balloon is the default option of the three choices listed above at the end of a PCP. The finance company will try to take this huge final payment from your bank account unless you take specific action to avoid it.

The problem is that you probably don’t have several thousands of pounds sitting in your current account when the finance company tries to take the final payment. The payment bounces and, suddenly, you have defaulted on your loan (probably with a default fee from your bank as well).

If you do have enough money in your account to cover the final payment, chances are you were probably planning to use it for something else, like mortgage payments, school fees or an upcoming holiday. And now that money has gone, leaving you in serious trouble.

So it’s important to make your decision about what you want to do before you get to the end of your agreement. Let’s have a look at your three options and explain what they really mean for you.

Option 1. Pay off the balloon and keep the car

If you have the money available and want to keep the car, you can pay off the final payment. A PCP is a form of hire purchase (HP), so the car is not officially yours until every penny is paid back to the finance company. If you pay off the balloon payment, the vehicle becomes yours in clear title.

If you are keeping the car, you don’t need to worry about mileage, condition or servicing history. It’s yours to do with as you like. You can sell it, burn it to the ground or just keep on driving it because it’s now officially your car.

Many finance companies used to give customers the option of refinancing the balloon, so would effectively take out another hire purchase to pay it off. Most no longer do this, although you can still take out a bank loan to pay it off.

When should you consider paying off the balloon?

  • If you want to keep the car and have enough cash to pay off the balloon
  • If the car is worth more than the balloon/GFV
  • If the mileage/service/condition charges of giving the car back are very high

When is this option not really ideal?

  • If you don’t have the money in the bank and have to borrow it
  • If the car is worth less than the GFV
  • If you don’t need the car and are not likely to use it

Option 2. Give the car back and claim the guaranteed future value

Instead of paying off the large balloon amount at the end of a PCP, you have the option of handing the car back after you have made all your monthly payments. The finance company will then sell the car at auction and hope to earn enough money to cover the balloon.

The finance company guarantees that they will accept the car instead of the final payment (the guaranteed future value) at the end of a PCP, regardless of its actual market value, as long as you have complied with the following requirements:

If you are over your mileage, you will be charged an excess mileage penalty (usually about 10p per mile, or £100 for every 1,000 miles).

If you have not had the car fully serviced on time, or serviced somewhere other than the correct franchise dealership, you will be charged a penalty (which will be hundreds, or even thousands, of pounds).

If the car has any damage that would not be considered normal wear and tear, you will be charged for “repairs” (the finance company won’t actually repair the car; it will be sold at auction but will theoretically be worth less money because of the damage). This also means that the car has to have all its bits and pieces present when you give it back – if you’ve lost a key, for example, you’ll be charged hundreds of pounds to cover the replacement cost.

Once you have given the car back to the finance company, and paid any penalties if required, the agreement is finally settled.

The GFV only applies at the end of a PCP. Depending on your circumstances, you may be able to give the car back early without waiting until the end of the agreement. For more information, read our guide to voluntary termination of a PCP.

When should you consider giving the car back to the finance company?

  • If the car is worth less than the guaranteed future value (GFV)
  • If you don’t need the car or a replacement
  • If you have met all of the mileage/servicing/condition requirements or are willing to pay the associated charges

When is this option not really ideal?

  • If the car is worth substantially more than the GFV
  • If the mileage/service/condition charges of giving the car back are very high

Option 3. Part-exchange the car at a dealership

This is the option that about 80% of PCP customers take at the end of a PCP. For most people, it’s the only real alternative because they can’t afford the balloon payment to keep the car and they can’t afford to be without a car if they simply give it back to the finance company.

It’s a common misconception that you have to go back to the same dealer, or at least stay with the same brand, when you part-exchange your car on another one. This is not true – you can go to any dealership, for any brand of car.

When you part-exchange your car, the dealer will value the vehicle and you will need to provide the exact settlement figure for the outstanding finance. Usually, the finance manager or salesperson will call the finance company while you’re there, so you can speak to them and get the precise figure and due date. The finance company will also then provide this in writing to the dealership.

Once the dealership has valued your car and you have your exact settlement figure, you will know whether you have any equity. So, if your car is worth £9,000 and your final payment is £8,000, you will have £1,000 of equity to put towards your next car.

However, if your car is only worth £7,000 but your final payment is £8,000, you will have £1,000 of negative equity. This position is becoming far more common, and means that you either pay the negative equity to the dealer, or you go back to option #2 and give the car back to the finance company. Sometimes the dealer will encourage you to add the negative equity onto your payments for the new car – don’t fall for this; it will only cause bigger negative equity problems down the line.

As part of the part-exchange process, the dealer will pay off your finance. You need to make sure you are handing the car over to the dealer at least a few days before the finance settlement is due, so that it can be paid on time. If the dealer has not paid the finance company before your final payment is due, the finance company will assume you are keeping the car and try to take the money from your bank account.

When should you consider part-exchanging the car?

  • If the car is worth at least as much as the GFV or more
  • If you are buying another car on another PCP
  • If the mileage/service/condition charges of giving the car back are very high

When is this option not really ideal?

  • If the car is worth substantially less than the GFV
  • If you don’t need another car

Hopefully, this will help you make the best decision for your needs when you reach the end of your PCP agreement. If you have any questions that are not covered above, feel free to post them in the comments section below.

Stuart Masson

Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

2 Comments

  1. If I decide to trade my pcp car in do I have to have another brand new car or can I trade it in for a used car if I cannot afford the payments on a new one

    Reply
    • Stuart Masson

      Hi Roger. No, you don’t have to buy another new car. You can choose whatever you like, new or used, from any brand you like and any finance company. The only limit is what you can afford.

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