How to refinance a PCP balloon payment

If you’re at the end of a PCP contract and want to keep your car but can't afford the final lump sum, here’s how you can refinance

By Christofer Lloyd Jun 30, 2022

If you’re not sure what to do once your current Personal Contract Purchase (PCP) finance deal comes to an end, don’t worry; there are several options available to you.

Since PCP finance splits the overall cost of a car across a deposit, a series of fixed monthly payments and an optional final payment (also known as the balloon payment) that you make only if you want to take ownership, it gives you low monthly payments and allows you to be flexible with how you proceed at the end of the contract.

When the contract ends, you can choose to hand the car back and walk away with nothing left to pay - provided you've stuck to the pre-agreed mileage limit and there is no damage beyond fair wear and tear.

Alternatively, you could 'trade it in' - using any equity, should the car be worth more than the optional final payment, to put towards the deposit on your next car. Or you could make the large optional final payment to own the car outright.

But what if you don't have many thousands of pounds to hand to make the optional final payment and still want to keep the car? Fear not, because there are a number of other options, including refinancing the car, so you can keep it without having to pay a huge lump sum.

Refinancing a PCP finance optional final payment

The idea of simply making the optional final payment to own the car outright might sound simple, but it can be tricky in reality, if you don't have plenty of cash to hand.

The problem is that the optional final payment may be half the initial cash price of the car - or potentially even more - at the end of a PCP finance contract. That means that a £20,000 car that may have cost you £265 per month on PCP with a £2,000 deposit, could have an optional final payment of £10,000. And most of us simply don't have that kind of cash to hand.

If you're in that camp but you'd like to keep the car - either because you've fallen in love with it, because a new car is a little out of reach, or simply beause you'd rather keep your current car than source another one, then refinancing could be the answer. And you have the option of taking out another PCP finance deal or Hire Purchase.

If your car is relatively new - typically up to around four or five years old - you can often refinance the optional final payment with another PCP deal, which consists of another series of monthly payments and then another, lower, optional final payment to make at the end if you want to own the car at this stage.

With Hire Purchase (HP), you can finance cars that are much older - often up to 10 years old or 100,000 miles at the start of the contract - and automatically own the car once you've made the last monthly payment.

Refinance via PCP

Refinance with another PCP deal and your monthly payments should drop noticeably (assuming the same contract length, deposit amount and mileage allowance).

That £20,000 car that might have cost £265 per month if you initially financed it at two years old, could be £150 per month if you refinanced the balloon payment - at six years old and with a £10,000 cash value - after the initial contract ended (again with a £2,000 deposit).

Go for this option and after another four years, the car may have an optional final payment of around £4,000. You can either pay this to own the car or refinance again.

Refinance via Hire Purchase (HP)

If you want to avoid having to pay a large final sum - and pay less interest overall - choosing Hire Purchase when the car is six years old would give you monthly payments of around £225 (again on a four-year contract with a £2,000 deposit).

After the four-year term, the car would then be yours to keep. Even if you had no cash at all to put down for another deposit, monthly payments would be around £265 - the same as the initial PCP contract, but with no large final payment needed to own the car.

This means that if you're coming to the end of a PCP contract and want to keep your current car, but don't have bags of cash to buy it outright, refinancing can be a simple and affordable way to do it. PCP offers the lowest monthly payments, however remember that you'll still need to pay a reasonably large final payment at the end if you want to own the car.

Meanwhile, with Hire Purchase there is no large final payment needed to own the car - and you will pay less interest than with an equivalent PCP deal, as you're paying off the finance balance quicker - but monthly payments will be a little higher.

Refinance via a personal bank loan

Another option for refinancing is going for a bank loan. This may work for you if you have a very good credit score, as you can take advantage of low interest rates, and you own the car from day one. However, be aware that with unsecured loans it's not just your car that could be repossessed if you fail to make payments on time.

Also, you may find you get a better deal with car finance, so it's always worth getting like-for-like PCP and Hire Purchase quotes too (with the same deposit and contract length), to see which offers you the greatest value.

Should I refinance my balloon payment or return the car?

Before making a final decision whether to hand your car back or refinance the optional final payment, it's helpful to compare the car's current value with how much you'd have to pay - or refinance - to purchase it.

If the car is worth less than the balloon payment, you may want to hand it back and purchase a similar used model for less (find out how much a similar used car would cost with the BuyaCar used car search tool here).

But if the car is worth more than the balloon payment, you could be better off paying - or financing - this amount to own the car for less than a similar used model would cost you. Click on the links below to find out more: