What happens at the end of a PCP finance agreement?

Coming to the end of your PCP finance deal and not sure what happens next? Keep reading to find out your options

BuyaCar team
Jul 31, 2020

Nine out of 10 new cars are purchased through PCP finance, as are hundreds of thousands of used models each year. As well as offering lower monthly payments than Hire Purchase or a traditional bank loan, PCP gives you several options at the end of the agreement - letting you purchase the car, 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. 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 stres.

Finance companies 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. They may potentially even contact you up to six months or so ahead, if the car is worth more than the optional final payment - known as having equity - which would mean that you could step into a new car at that stage without having to pay anything extra to settle your current contract.

In fact if you have equity - with the car being worth more than the remaining finance balance - you can put this extra amount towards the deposit on your next car, cutting your monthly payments on the next car. We’ve outlined key information below, depending on what you want to do next, followed by more in-depth answers to the most common questions.

  • 1. 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 around a third to half of the car's value depending upon the model and contract length and can be refinanced. More details
  • 2. 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; charges for damage beyond fair wear and tear and for excess mileage, should you go beyond the agreed mileage limit may be issued. It’s normally possible to 'trade in' the car for a new one with many retailers. If the car is worth more than the optional final payment, then there will be a surplus that you can put towards the deposit on your next car, reducing your monthly payments. More details
  • 3. 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 apply. If the car is worth more than the optional final payment, you will probably be better off making the optional final payment to buy it and then selling it privately or selling to a car retailer with the agreement of your lender - they 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

End of PCP - in depth

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

 

How PCP works

1. Deposit and delivery
  • The larger the deposit, the lower your monthly payments will be
  • Low and no-deposit options are often available
2. Monthly payments
  • A fixed payment is due every month for the rest of the contract
  • Monthly payments only cover part of the car's cost, keeping them low
3. Buy / return / upgrade
  • Pay the remaining balance or refinance to keep the car
  • OR Return the car with nothing left to pay
  • OR Trade-in the car for another vehicle if it is worth more than the balance

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 you have:

  • 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 ready to inspect outside in the light

The inspection may be postponed if the weather is too poor, or if it’s too dark to be able to conduct proper checks. If the car is sufficiently dirty enough that it can obscure damage, you may be liable to extra charges.

The car is assessed according to the industry standard Fair Wear and Tear standard, published by the British Vehicle Renting and Leasing Association. Your finance company will be able to provide you with a copy.

This sets out the type of damage that is deemed as normal on a used car. Small chips, dents up to 10mm, and small scratches up to 25mm are deemed normal. Any scrapes larger than this may result in extra charges. The level of fair wear and tear expected varies with the type of contract: the longer the contract and the higher the agreed mileage, the more wear and tear will be allowed. A car on a short 18-month contract with a 6,000-mile-per-year limit will be expected to look practically new, while greater wear will be expected with a car on a four-year, 20,000-mile-per-year contract.

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 if you believe any of the charges are unfair. 

Potential charges when returning a car at the end of PCP

As PCP payments are based on a car's future value, anything that affects this value could result in extra charges to compensate the lender for the value they've lost - if the car they receive back is worth less than it should be. This primarily means the following:

  • Excess mileage
    At the beginning of any PCP agreement, you'll need to agree to an estimated annual mileage figure. 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 - thus increasing the difference between the car's price at the start of the contract and its expected value when you hand it back. However, if you underestimate the mileage and end up exceeding the agreed figure, you will find yourself with penalty charges, which can be as much as 30p per mile or even more in some cases. 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 in subsequent years.
  • Damage
    As mentioned above, damage outside of the fair wear and tear standards is likely to result in charges. Charges vary between vehicles and lenders, but some alloy wheel scratches can cost more than £50 to repair; dented bumpers may result in a charge of £100 or more; and windscreen chips are typically £20 or more.
  • Missing items
    Missing documents, or equipment will all result in charges, whether it's a V5 logbook (typically you'll have to pay the 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 because 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, though you may have a couple of months of slightly higher monthly payments instead.

Manufacturers recommend inspecting your car around 10 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 may be cheaper to get these repaired yourself, rather than risking damage charges, but you'll need to use a reputable compay to ensure that you don't get fined because of a bodged job.

You can always contact the finance company to gauge the type of charge you're likely to face for any damage and compare that with quotes you get yourself to address issues - if it's cheaper to get it fixed yourself you can do that, if not you can leave it. In some cases, something that looks like damage to you may be accepted by the finance company without fuss.

You're also likely to face charges for missing 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 them out yourself. Again, you may want to check the likely cost for any missing kit with the company to see whether you can source replacements for less yourself.

 

Fair wear and tear

The British Vehicle Renting and Leasing Association Fair Wear and Tear standard is used across the industry, detailing wear that is 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. For all the details, read our comprehensive guide to fair wear and tear.

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 optional final payment and the car is yours. Until then, the finance company owns the car. But at that point, you will become the owner.

Refinancing

If you want to keep the car but can’t afford to pay the full optional final payment in cash, this can often be refinanced. Typically this means taking out a Hire Purchase contract. Bear in mind that this will mean you don’t own the car until you’ve made the last monthly payment, though as this is Hire Purchase, rather than PCP, there is no large optional final payment needed at this stage.

If you intend to own a car from the start, you'll end up paying less interest overall with Hire Purchase than PCP (provided the contract terms are the same), as you're paying off the balance faster. You also won't face a large final payment that will add more interest to the bill if you go on to refinance it at the end of the contract. With that in mind, if you know you want to own the car and can afford the higher monthly payments with Hire Purchase, considering taking out a Hire Purchase contract to begin with.

Checks and charges

As you become the car’s owner by making the optional final payment, the condition and mileage of the car don’t matter - as you're not returning the car to the finance company - so there are no additional charges.

Selling the car

If the car is worth more than the optional final payment, you’ll probably be better off making this payment to buy the car - if you can afford to do so - and then selling it for a higher amount.

In many cases, you won’t have to find the money upfront because lenders are generally happy for you to sell the car at the end of the agreement - provided you check with them first and declare to any buyer that there is outstanding finance. 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 a deposit on 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 can 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, so you don't have to worry about being without a car.

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 should be able to settle the finance on your behalf and arrange another finance agreement for your next model.

What happens if the car is worth more than the optional final payment?

If someone sells a car they own 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 story when you trade in a car at the end of a PCP agreement, but there’s one extra step, as you don't own the car.

You’ll need to let the company know how much your optional final payment is and they’ll value the car. As long as their valuation is more than that amount, then it’s a simple matter of them buying the car from the finance company and then you'll be able to take advantage of the surplus.

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

Any surplus is then put towards a new car - where it can go towards the deposit on a new finance agreement, reducing the monthly payments - or you can choose for it to be paid directly into your bank account.

What happens if your car is worth less than the optional final payment

In this case, trading your car in is a bad move. If no one will buy your car for the value of the optional final payment, then you would have to pay the difference between what you could sell the car for and the remaining finance balance to ensure that the lender is paid enough to settle the agreement.

Instead of doing this, you should simply return the car to the lender as you'll have nothing further to pay provided the car's within the pre-agreed mileage limit and in good condition. The low value of the vehicle is then their problem.

 

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