What is a mileage allowance?

Financing a car and perplexed by mileage allowances? Higher limits mean higher monthly payments but less chance of end-of-contract charges

By BuyaCar team February 1, 2024

If you're looking to finance a car, then it's likely you've come across mileage limits - typically seen with PCP finance and car leasing.

Generally speaking, the lower the mileage allowance on your agreement, the lower your monthly payments will be. That's because a lower-mileage car will be worth more when it's sold on, reducing the difference in value between the car's initial price and its estimated value at the end of the contract - the key factor in determining what you pay every month with PCP finance.

If you lease a car, you have to give the car back to the leasing company at the end of the contract. Since a high mileage lowers a used cars value, the more miles you expect to travel, the more you'll have to pay every month to cover the fact you're handing back a less valuable car. 

Most people who take out PCP finance hand it back at the end of the contract, stepping straight into another finance deal. Do this and you'll encounter mileage limits, as the car is never yours.

The finance company calculates how much to charge based upon the difference between the car's initial value and what it's expected to be worth at the end of the contract - which is affected by its age, mileage and condition. As a result, all PCP deals and leases feature a mileage limit.


Opting for a lower mileage allowance means that the car will be worth more at the end of your term. So if you are set on owning it once your monthly payments are up - by making the large optional final payment - you will need to find more money to buy it at this stage. 

If you plan to hand the car back, you can find yourself saving money by setting your mileage limit as low as possible, provided you are able to stick to it. Setting a mileage allowance that is too low, though, can cause problems. If you go over your limit, you will be issued with excess mileage charges when you hand the car back.

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What is an excess mileage charge?

If you exceed your agreed mileage allowance, the finance company will issue a per-mile charge against you. This can vary from around 3p per mile to more than 70p with some rare sports cars, so the costs can add up very quickly.

This is deliberate on the part of finance companies - PCP finance and car leasing rely on companies having a good idea how much cars will be worth at the end of the contract. They make it more expensive to incur excess mileage charges than simply setting a higher-mileage contract from the start.

Additionally, these charges are often stepped, with the initial amount of excess mileage being charged at a lower rate - for instance for the first 5000 miles, while any further amount above that is charged at a higher rate. This means that if you go way over your limit you could find yourself facing a particularly steep bill.

Something else to look out for is whether or not the advertised figure for the excess mileage charge includes VAT. If not, then you’ll need to factor that in as an extra possible expense.

It's worth taking some time to carefully work out your likely mileage before you commit to a finance contract, so you shouldn't have to pay any excess mileage charges. The higher the excess mileage charge, the more this could save you.

Bear in mind that it is possible to change your mileage allowance in the middle of your contract. This could be useful if your circumstances change and you end up travelling much further than expected - which could be the case if you change jobs and suddenly have a much longer commute, for instance.

Meanwhile, if you find yourself being able to work from home most of the time and your annual mileage plummets, you can also contact the finance or leasing company to arrange to drop your mileage allowance, which should cut your monthly payments. 

What happens at the end of a PCP?

How can you work out your annual mileage?

Roughly speaking, the typical UK driver only covers around 7000 miles per year. But it’s very easy to rack up additional miles. For example, even if your commute is just 10 miles each way, you could easily accumulate more than 5000 miles each year going to and from work alone.

Then you need to calculate the length of your other weekly trips and think about any other longer road trips you might take. If every other week you make a 200-mile trip to visit family, factor this in, as it could easily add in a futher 5000 miles every year.

And don't forget about any foreign trips - if, for instance, you drive to the south of France every summer, as one of these trips alone could add 2000 miles. It's best to be over-cautious when estimating your mileage and going for a limit that's a little higher than what you think you'll cover, to reduce the chance of end-of-contract charges.

Should I go for a low-mileage contract and pay excess mileage charges?

In almost all cases it will be more expensive to pay a per-mile excess charge on your finance agreement than going for a higher-mileage contract. However, since excess mileage costs are so variable, it is worth doing the maths.

For example, if the particular arrangement you’re considering involves a stepped mileage excess (eg. the penalty for excess mileage is less per mile for the first chunk of extra miles and then any miles beyond this figure become more expensive) it can, in certain circumstances, be a little cheaper if you only cover a small amount of excess miles. In the vast majority of cases, however, it will be a more expensive option.

If you are part of the way through a car finance term and think you might go over your planned mileage limit, then the best course of action is to contact the finance company and ask them to increase your mileage limit.

This will result in a slight increase to your monthly payments (how much depends on how many miles you want to add and how close to the end of your contract you are) but it will normally work out cheaper than simply stumping up for the excess mileage charge.

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Do different forms of finance affect excess mileage charges?

PCP finance includes a set mileage allowance and excess mileage charges, as the mileage of the car affects its value at the end of the contract. Go over the limit and the finance company gets a less valuable car back, increasing its costs.

This is because the amount of miles a car has on the clock has a fundamental impact on its used value. Make the optional final payment to buy the car and you don't have to worry about excess mileage charges with PCP, however, as the car will then be yours.

Likewise, with a car lease agreement - where you have no choice to buy the car and have to hand it back to the finance company at the end of the term - you will have to stick to a mileage limit. As you have to return the car come what may, this is the most likely form of finance to involve excess mileage charges.

In a traditional Hire Purchase (HP) contract, you generally wouldn’t expect excess mileage charges because the agreement is set up so that you automatically own the vehicle once you've made all the monthly payments.

There are, however, hybrid products like HP with a 'balloon payment' (a large payment at the end of your contract that you have to pay to own the vehicle outright).

As products like these have certain characteristics of both PCP/leasing and HP, it’s important to check what the exact terms of such a contract say - they may well involve excess mileage charges, but if you're sure you're going to buy the car at the end of the contract, it's unlikely this will ever cause issues.

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Handing a car back early to avoid excess charges

It is possible to hand a car back early if you're on a PCP finance or Hire Purchase deal through a process known as Voluntary Termination. This means that, as long as you’ve paid at least half of the total balance due (that's half of the total including interest, charges and the large optional final payment in the case of PCP), you shouldn’t incur excess mileage charges.

Voluntary Termination is designed to allow those experiencing financial hardship to return a car on PCP or HP early, without additional charges. However, some finance companies may still chase you for payment of excess mileage charges (calculated on a pro-rata basis from the stage when you returned the car) or try to bill you for any damage beyond fair wear and tear. If you've followed the Voluntary Termination process and the car is in reasonable condition, though, they shouldn't be able to enforce this.

Do bear in mind that Voluntary Termination doesn't apply to PCH leasing. If you're looking to hand back a lease car early to avoid excess mileage charges, therefore, this is unlikely to be possible. In some cases you may encounter early cancellation fees and could still be liable for all of the remaining monthly payments - despite handing the car back.

As a result, if you want maximum flexibility in terms of potentially being able to return the car early, it's worth considering PCP finance to get a blend of low monthly payments and added protection if you end up needing to terminate the contract ahead of time.