What happens at the end of a PCP finance agreement?

BuyaCar team
Nov 26, 2018

Nine in ten new cars are bought on PCP, as are hundreds of thousands of used models each year. As well as offering low monthly payments, PCP brings flexibility at the end of the agreement.

Your options can seem bewildering. Are you better off returning the car or keeping it? Will you gain by trading it in? And how do you avoid damage and mileage charges?

Lenders will typically contact you at least a month before your final payment is due, to remind you that the agreement is coming to an end and to set out your options.

We’ve outlined the key information below, depending on what you want to do next, followed by more details on the most common questions.

  • 1. You want to keep the car You’ll need to pay an additional lump sum, known as the balloon payment, which was agreed at the beginning of the term: this can be refinanced. More details
  • 2. You want a different car PCP gives you the ability to return the car to the lender. It will be checked and collected; charges for damage or excess mileage can be applied.
    It’s normally possible to trade the car in for a new one with any good car retailer. If the car is worth more than the balloon payment, then there will be a surplus that can be put towards another car or returned to you. More details
  • 3. You don’t need another car Return the car to the lender and you’ll have no more monthly repayments to make, although charges for excess damage may appl
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    If the car is worth more than the balloon payment, you will probably be better off selling it privately or to a car retailer, with the agreement of your lender. More details

End of PCP - in depth

Scroll down for more information on your end of PCP options, and an explanation of how the PCP options are calculated or click below to jump to any section.

 

How PCP works

Under PCP, you borrow the full cost of the car, and you repay interest on this loan.

PCP payments are based on the cost and its estimated worth at the end of the agreement. The monthly repayments cover the difference - the amount that it’s expected to lose in value.

The lender estimates the car’s future value at the beginning of the agreement and guarantees it. It’s known as the balloon payment or guaranteed minimum future value (GMFV)

That’s why you can simply return it at the end: handing the car back settles the finance and you’ll owe nothing more - even if the car is worth less than expected.

Alternatively, paying or refinancing the balloon payment will mean that you’ll own the car.

However, the car is often worth more than the balloon payment. If you trade it in with a car retailer, they will settle the finance on your behalf (by making the balloon payment), leaving a surplus that can be paid out or used towards another car.

 

Returning a car

What happens when you return a car

You’ll need to tell your lender that you are planning to return the car in plenty of time, so that they can book an appointment to inspect and collect the car at a convenient time.
You’ll need to make sure:

  • Original documents, including logbook (V5) and handbook
  • All of the equipment, including spare key, spare wheel and parcel shelf
  • The vehicle must also be clean inside and out and must also be ready to inspect outside in the light.

If the weather is poor or light too dark, then the inspection may be postponed. This may also happen if the car is dirty, which can obscure damage. In this case, you may be charged extra.

The car is assessed according to the industry's Fair Wear and Tear Standard, which is published by the British Vehicle Renting and Leasing Association, and available from your finance company. It sets out the type of damage that is normal for a used car (such as small chps, dents up to 10mm in diameter and small scratches of up to 25mm). Any scrapes that are larger are likely to result in extra charges.

Damage or missing items will be marked on a checklist, along with the mileage, and you'll need to sign this to confirm that you accept the findings. You'll be told within four weeks if there is anything more to pay. This can be disputed

 

Potential charges when returning a car at the end of PCP

Because PCP repayments are based on a car's future value, anything that affects this could result in extra charges to compensate the lender. This primarily means the following:

  • Excess mileage
    At the beginning of any PCP agreement, you'll need to estimate your annual mileage. It's worth being as accurate as possible: the higher the mileage estimate, the more you'll pay each month because the car is likely to be worth less at the end. However, if you underestimate the mileage and end up exceeding it over the course of the agreement, you will find yourself with penalty charges, which can be as much as 10p per mile.
    Mileage is only checked at the end of the agreement and not each year, so you can go beyond the limit one year if you make up for it by travelling fewer miles before the end of the term.
  • Damage
    As mentioned above, damage outside of the fair wear and tear standards is likely to result in charges. Charges vary between vehicles and lendes, but some alloy wheel scratches can cost more than £50; dented bumpers may result in a charge of £100 or more; and windscreen chips are typically £20 or over.
  • Missing items
    Missing documents, or equipment will all result in charges, whether it's a V5 logbook (typically replacement cost plus an admin charge) or a key, which can cost more than £100. 

 

Avoiding charges at the end of PCP

Fail to prepare, and prepare to pay: planning for the end of your PCP term may not be top of your weekend wishlist, but it's likely to be time well spent.

If your circumstances change and it looks like you're going to exceed your mileage allowance, then it's worth letting your lender know immediately beacuse they will probably be able to recalculate your future payments, to take a higher mileage into account, ensuring that you're not left with a big bill at the end.

Manufacturers advise inspecting your car around ten weeks before the end of the term, looking carefully at each panel and wheel in bright daylight to spot any scratches or dents. You can compare these against the fair wear and tear guidelines (see below) to identify any excessive damage. It is likely to be cheaper to get these repaired yourself, than risk damage charges, but you'll need to use a reputable compay to ensure that you don't get fined because of a bodged job.

It's the same case with mising equipment, such as a spare key or documents. Finance companies typically add admin fees to the cost of replacements, which you won't have if you sort it out yourself.

 

Fair wear and tear

The British Vehicle Renting and Leasing Association Fair Wear and Tear standard is used across the industry, detailing defects that are acceptable in a used car, and damage that's not. Inspectors take into account the age and mileage of the car, so older cars won't be expected to meet the same standard as newer ones.

Your finance company will be able to supply a full guide, along with any additional requirements and you should rely on these to work out whether your car's condition is acceptable or not. As an idea of what's included, general points include:

Paintwork and bumpers
  • Some small chips are acceptable
  • No more than two dents per panel - up to 10mm in diameter
  • Some scratches and scrapes up to 25mm are acceptable, if not down to primer or bare metal
Windows and glass
  • Light scratches that don't affect visibility are acceptable
  • Chips, cracks and holes must be repaired
  • Damage to lamp covers is not acceptable 
Tyres and wheels
  • Tyres must meet legal tread requirements
  • Wheel dents are not acceptable
  • Wheel scuffs totalling 50mm on an entire wheel are acceptable
Interior and equipment
  • Spare wheel or inflation kit and spare keys must be present
  • Seats must be clean, odourless and without burns, scratches or staining
  • Mirrors, sun blinds, parcel shelf must be in place

 

Buying a car at the end of PCP

Settle the finance by making the balloon payment and the car is yours. Until then, the finance company own the car. But at that point, you will become the owner.

Refinancing

If you want to keep the car but can’t pay the full balloon payment, the amont can often be refinanced. For relatively new cars, you may be ale to take another PCP agreeement, or Hire Purchase.Bear in mind that this will mean you don’t own the car until you’ve made the final payment.

Checks and charges

Becuse you become the car’s owner, the condition and mileage of the car don’t matter, so there are no additional charges.

Selling the car

If the car is worth more than the balloon payment, then you’ll probably be better-off buying the car and then selling it for a higher amount.

In most cases, you won’t even have to find the money upfront because lenders are generally happy for you to sell the car at the end of the agreement. It’s simplest to do this through a car retailer, as they can settle the finance on your behalf and return any surplus to you (or put it towards another car).

 

Trading in / part-exchanging your car at the end of PCP

How it works

By trading in your car at the end of a PCP agreement, you should ensure a seamless transition from one car to another. Any good car retailer will be able to take your existing car, settle the finance on your behalf and set up a new finance arrangement to avoid any disruption. It’s normally possible to arrange for a vehicle to be picked up on the same day that another is dropped off.

Buying a car from a different manufacturer or retailer

It doesn’t matter where you bought your current car or what badge is on the bonnet, you can trade it in for any other new or used model.

Any good car retailer is able to settle the finance on your behalf and arrange another agreement for your next model.

What happens if the car is worth more than the balloon payment?

If someone sells a privately-owned car to a retailer or buying company, they’ll agree a price and be paid in cash (or more likely a bank transfer).

It’s the same when you trade in a car at the end of a PCP agreement, but there’s one extra step.

You’ll need to let the company know how much your balloon payment is and they’ll value the car. As long as the car is worth more, then it’s a simple matter of buying the car.

However, instead of handing over the money, the company will settle the finance on your behalf by making the balloon payment to the lender.

Any surplus is then put towards a new car - where it’s often the deposit for a new finance agreement - or you can choose it to be paid directly into your bank account.

What happens if your car is worth less than the balloon payment

In this case, trading your car in is not a good move. If no-one will buy your car for the value of the balloon payment, then you’ll need to use your own money to ensure tat the lender is paid enough to settle the agreement.

Instead, you should simply return the car to the lender. The low value of the vehicle is then their problem.

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