PCP balloon payment: what it is and when to pay it

Not just hot air: a PCP balloon payment is the key to low finance payments and getting a good deal at the end of your PCP agreement

BuyaCar team
Feb 5, 2019

PCP finance generally offers low monthly payments and plenty of flexibility for new and used cars. It may make your ideal car affordable, and allow you to regularly change your vehicle with ease.

The PCP balloon payment is a key part of every PCP agreement, and has a major impact on the cost of your monthly payments. You'll need to be particularly aware of it if you're planning to keep your car for several years.


What is a PCP balloon payment?

A PCP balloon payment is the final lump sum needed to take ownership of a car at the end of a PCP finance agreement. It is fixed at the beginning of the contract, so you'll always know the cost of keeping the vehicle. The payment is optional, as you are also able to return the car to the finance company and walk away with nothing more to pay.

The balloon payment is also known as your car's guaranteed minimum future value (GMFV). It's an estimate of the vehicle's value at the end of the finance agreement, and offers protection against an unexpected fall in your car's value: if the vehicle is worth less at the end of the agreement, then the lender will face the financial loss if you return it.


How PCP balloon payments are calculated

At the start of any finance agreement, your lender will estimate the value of the car at the end, using industry guides to help. This becomes the balloon payment.

Your monthly instalments are then calculated. They will add up to the difference between the price of the car at the start and the balloon payment at the end (minus any deposit).

In other words, they cover the value that the car is expected to lose over the term, and not the full price of the car.

That's why vehicles that retain a high proportion of their value can be relatively cheap to finance.

At the end of a PCP agreement, the remaining debt should be roughly equal to the car's value, so you can either hand the vehicle to the lender or make the balloon payment to settle the finance.

If the car loses more value than expected, then you don't need to worry: you can still return it and the lender will take the financial hit.


Should I make the balloon payment?

If you want to keep the car, then you should consider making the balloon payment. This can be done by paying the lender in cash or by refinancing the payment, which could take the form of another PCP agreement (depending on the car's age) or a Hire Purchase arrangement, which will leave you as the car's owner at the end.

However, before making any payment, it's worthwhile getting your car valued by a car retailer or buying group. If it's worth less than the balloon payment, then you may be better off returning the vehicle and then buying a similar model on the second-hand market for less.

When your car is worth more than the balloon payment

If your car is worth more than the balloon payment, then stumping up the fee, could leave you better-off in the long run, even if you don't want to keep the car.

  • You might want to sell the car immediately, leaving you with a surplus amount. It's not a profit, but some of your monthly payments that are being returned to you. 
  • Alternatively, you can part-exchange the car for another vehicle. The car retailer will make the balloon payment on your behalf - effectively buying the car for themselves - and the surplus can be put towards another vehicle.
  • It's normally possible to sell the car at the end of a PCP arrangement, with the agreement of the lender. Most of the proceeds will go to the lender to settle the finance and you'll be able to keep any surplus.

Cars are often worth more than the balloon payment because lenders often use a cautious quote, to reduce the chances of an unexpected drop in car values (depreciation), leaving them with vehicles that are worth less than expected - a loss for lenders.

It also means that you're effectively overpaying for the car because the monthly instalments usually add up to more than the depreciation. If you do return the car, that money goes into the lender's pocket rather than yours.


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