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How to avoid finance and leasing penalty charges

You could be charged hundreds or even thousands of pounds in penalty charges at the end of your car finance agreement. Here's how to avoid it.

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With most new car drivers paying for their vehicles through either a personal contract purchase (PCP) or contract hire (either business or personal), it’s important to make sure that your car is in good condition if/when you want to hand it back to the finance company at the end of the agreement.

Your lease payments or monthly finance payments are determined by the car’s predicted value at the end of the contract. This value is calculated by the car being under its agreed mileage limit, with a full manufacturer service history and in excellent condition.

If you don’t adhere to all three of these requirements, the leasing or finance company will charge you some pretty harsh penalty fees. You may be able to dispute some of them, but others are simply not negotiable and you could be obliged to cough up hundreds or even thousands of pounds to settle the bill.

Today we’ll look at how you can avoid these costs. Here’s a list of our top tips to avoid being hit hard by your car finance lender.

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1. Estimate your mileage accurately

Your PCP or lease payments can be significantly affected by your predicted mileage, and it’s very tempting to reduce your annual mileage allowance to bring your monthly payments down a few quid. However, if you exceed the mileage limit over the course of the agreement, the finance company will charge you a penalty that is much higher than what you would have saved.

On average, the excess mileage fees tend to be about 10p per mile, which works out to £100 for every 1,000 miles you go over your allowance. This can add up very quickly if you’re not careful, and some drivers find they have a bill for thousands of pounds at the end of a four-year lease or PCP.

Driving habits have certainly changed as a result of the Covid pandemic, but your finance or lease agreement will probably last for the next three to four years. So make sure you consider what you might need over the whole term of the agreement, not just right now. Many finance or leasing companies (but not all) will allow you to increase your allowance mid-term if you find that your mileage has gone beyond what you expected at the beginning, but it’s better to have estimated more accurately in the first place.

2. Service your car on time, and at the dealership

We’ve covered this before, but it’s important to state it again: You will almost certainly be obliged to have your car serviced with a franchised dealership if you are leasing a new car, or financing it on a PCP. If you are financing a used car, check your paperwork to find out what your servicing requirements are.

This catches a lot of people out, because the car manufacturers can’t force you to service the car with their dealerships to maintain your new car warranty. However, this has nothing to do with your finance agreement. The leasing company is basing the final value on a full manufacturer service history, and they can legitimately argue that a car with a full service history is worth more than one without.

Again, there are some eye-watering penalties if you take the car elsewhere, that will cost you much more than the extra cost of servicing the car at the fancy dealer service centre.

You may also like: What does “Full Service History” actually mean?

3. Get minor scuffs and scrapes fixed

Finance and leasing agreements use phrases like “fair wear and tear” and “good condition”, but there is very little legal guidance as to what these actually mean (although there is an industry standard for leasing companies; see point 9). As such, the interpretation varies widely, but it’s fair to say that a leasing company will usually take a much stricter view than the customer.

Most companies will be able to provide you with a guide to what is acceptable for minor damage so that you can work out whether you will need to get any little scrapes attended to before returning the car. As a guide, light scratches less than an inch in length are usually OK but your leasing company may have its own requirements.

Usually, it will cost you a lot less to have minor damage professionally repaired than whatever the finance company decides to charge you. And ignoring a scratch in the hope that the finance company won’t notice it is not usually a good strategy, either.

The finance company won’t usually fix the damage you’re being charged for; they’re just using their own assessment of what they think it would cost to repair. The car will probably be sent to auction in its damaged state and the dealer buying the car will fix it. You can dispute any invoices for damage, but it’s usually fairly futile unless you have evidence that the damage is less than what they’re describing.

4. Get repairs done professionally

Following on from the point above, it’s important that any repairs you do make to the car are done properly and professionally. The repair has to meet the standard of the original vehicle, rather than being a bodge job, and the finance company is within its rights to expect that damage is repaired to the same standard as the rest of the car.

If the leasing company decides that the repair is sub-standard, they’ll charge you for the repair at whatever they think it should be just as if you’d not had it fixed in the first place (see above). That means you’ll basically be paying for the car to be fixed twice.

It’s usually best to use a service centre or body shop that’s approved by the car manufacturer – that way, it’s difficult for the finance company to argue that the quality of repair is sub-par.

5. Sort out any warning lights

It’s common sense that you should check your car when any warning lights pop up on your dashboard. But it’s tempting to not bother topping up fluids or repairing slow punctures when you know that you’ll be handing the car back shortly. That laziness could cost you much more than it needs to.

As with everything else we’ve mentioned, the penalty fees charged by the leasing company to top up your coolant or windscreen washer fluid will almost certainly be higher than the cost of doing it yourself. Check your fluid levels and top up anything that is below the indicated level before you hand over the keys.

6. Remove decals and wraps

Plenty of people will apply decals or magnets to their vehicles to promote their business, or maybe even give the car a complete wrap to make it really stand out from the crowd. That’s fine as long as you return the car to its original state before you hand it back, and address any damage that may have occurred to the paintwork.

Decals can sometimes leave a sticky residue, so you’ll need to make sure that’s completely removed. Plus, that residue will inevitably attract dust and dirt that will (surprise, surprise) stick to it and potentially start scratching your paintwork underneath. It’s also easy to scratch the paint when applying or removing decals, so be careful to protect the paint.

The same applies to magnetic signs, especially if the car isn’t pristinely clean when you stick the sign onto the car. If there’s any dirt under the magnet, it can scratch the paint every time the magnet moves (which it will do all the time, even if it’s only a tiny amount). Never slide magnetic signs along the paintwork; if you want to move or adjust the sign, peel it off and reapply it.

7. Repair or replace a chipped windscreen

It’s almost impossible to avoid a chip in your windscreen over three or four years of driving. Like paintwork damage, you can argue with the finance company over whether a chip is chargeable damage or fair wear and tear, but you’re probably better off getting it fixed rather than wait for them to invoice you and then try to fight it. Plus, of course, a small chip can quickly lead to a far more substantial crack in the windscreen that will mean replacing the whole glass instead of repairing a tiny chip.

Most car insurance policies have some sort of windscreen cover as a specific part of the policy, so bear this in mind when selecting car insurance and take advantage of it rather than ignoring a chip.

8. Hand back a clean car

It’s very tempting to not bother getting your car properly cleaned during your lease or before handing it back. After all, if it’s not damaged there’s nothing they can do about it, right?

The finance company can charge you for any stains to the interior, or even bad odours (wet dogs and cigarette smells are particularly awful) if it can be demonstrated that the smell is likely to affect the car’s value. As a buyer, you wouldn’t want to buy a car that reeked of cigarette smoke or someone else’s pets, and it can be expensive to fix stains on upholstery, so these will be charged accordingly.

Fortunately, a professional clean and valet can take care of most of that, as well as polishing up the paintwork to eliminate minor scratches. Proper car detailing can seem expensive, but it may be worth much more than it costs if it saves you penalty charges from the finance company.

9. Know what the industry standard says

Leasing companies should be following the industry standards set by the British Vehicle Rental & Leasing Association (BVRLA) for vehicle returns. You can and should request your leasing company to provide you with a copy of this. The BVRLA helpfully offers you the opportunity to order a copy directly from them, but you have to order a minimum of ten copies and it will cost you £20…

The BVRLA standard is not legally binding, but it is a good guide of what to expect and gives you a starting point for any disputes you have with the leasing company over whether any damage should be considered fair wear and tear. If the leasing company is a member of the BVRLA, it’s obliged to work to the industry standards. The BVRLA also has a guide for customers returning lease vehicles.

10. Make the time to get any work done

If your car needs a service, or if you need to have any repairs undertaken, you need to allow time for that to happen before you hand the car back to the lender.

You should check the vehicle over 10-12 weeks before the return date to give yourself plenty of time to book it in and for the work to be done. Don’t leave it until the last minute or else you will run out of time.

This article was originally published in July 2018, and was most recently updated in September 2022.

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive 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.