What happens at the end of a PCP finance agreement?

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

Finance companies will typically contact you at least a month before your final payment is due, to remind you that the contract is coming to an end and to set out your options. They may even contact you up to six months or so ahead, if the car is worth more than the optional final payment - which is known as having equity - as this 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 new finance deal. We’ve outlined the key options 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 anywhere between a third and half of the car's value at the start of the contract, depending upon the model and contract length. This 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 and you're likely to be charged for any damage beyond fair wear and tear and any excess mileage over the pre-agreed mileage limit. It’s possible to trade in the car for a new one with many retailers, too. If a retailer deems the car worth more than the optional final payment, there will be a surplus that you can put towards the deposit on your next car, reducing future 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 be issued. If the car is worth more than the optional final payment, you will probably be better off making that payment to buy it and then selling it privately or, with the agreement of your lender, selling to a car retailer who 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

How does PCP work at the end of the term?

There are several different end-of-contract scenarios with PCP finance, depending upon whether you want to keep the car, trade it in for another model or hand it back to the finance company and walk away.

Scroll down for more information on your options when you reach the end of a PCP deal, an explanation of how these PCP options work and to understand how the costs are calculated, or you can click on one of the links below to jump to any of the individual sections.

How PCP works

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 (V5C) and handbooks
• 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  dirty enough that it potentially obscures any damage, you may be liable for extra charges.

The car is assessed according to the industry standard Fair Wear and Tear guidelines, published by the British Vehicle Rental 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 normal for a used car. Small chips, dents up to 10mm, and scratches up to 25mm are normally deemed acceptable. 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. 

Are there potential charges when returning a car at the end of PCP?

As PCP monthly payments are based on an assumption of the car's future value, anything you do that negatively 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 contract, 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 end-of-contract 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 result in charges, whether it's a V5C logbook (typically you'll have to pay the replacement cost plus an admin charge) or an absent second key, which can cost more than £100 to replace. 

How do you avoid charges at the end of a 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, as it could drastically reduce any charges you may be issued.

If your circumstances change and it looks like you're going to exceed your mileage allowance during your contract, then it's worth letting your lender know immediately because they may 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 will have slightly higher monthly payments instead. It should work out cheaper overall to change your mileage allowance than simply racking up many additional miles and being billed at the end.

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 to identify any excessive damage. It may be cheaper to get any issues repaired yourself, rather than risking damage charges, but you'll need to use a reputable company 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 any damage 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 as being within the expectations of fair wear and tear.

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.

What is fair wear and tear?

The British Vehicle Rental and Leasing Association 'Fair Wear and Tear' standard is used across the industry, detailing wear that is 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:

Buying a car at the end of a PCP finance deal

If you want to take ownership of the car, settle the finance by making the optional final payment and the car is yours. Until then, the finance company owns the car. Once you've made the optional final payment - provided the deposit and all of the monthly payments have already been paid - you will become the owner.

Do this and you're free to keep the car, trade it in or sell it, as it no longer belongs to the finance company.

Refinancing

If you want to keep the car but can’t afford to pay the full optional final payment, 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 on the Hire Purchase contract, though.

As this would be a Hire Purchase setup - rather than PCP - there is no large optional final payment needed at the end of the second contract; you simply make any deposit, followed by all of the monthly payments and once these are complete, the car is yours.

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. With that in mind, if you know you want to own the car and can afford the higher monthly payments with Hire Purchase, consider 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 with PCP finance, 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.

There's also no need for any end-of-contract checks, since you'll have taken ownership from the finance company, so it has no further interest in the car once the optional final payment is made.

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 on the car.

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 you may be able to put it towards a deposit on another car if you want to trade it in for a new one).

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 contract, you can ensure a seamless transition from one car to another. Most car retailers 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 for any length of time.

Can you buy 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. This means that you needn't feel tied to a specific manufacturer and are free to pick the car that best suits your needs, whatever brand it is.

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 on 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 contract, but there’s one extra step, as you don't own the car.

You’ll need to let the company buying the car know how much your optional final payment is and they’ll value the car. As long as their valuation is more than the optional final payment, 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.

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 or more, 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 contract.

Instead of doing this, you're better off by simply returning 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.