Optional Final Payment

Meaning and Definition

Optional Final Payment, also known as a balloon payment or guaranteed future value, is a feature in certain car finance agreements, particularly in Personal Contract Purchase (PCP) agreements. It refers to a lump sum payment that the borrower may choose to make at the end of the finance term to own the vehicle outright. The optional final payment is set at the beginning of the agreement and is based on the estimated future value of the vehicle.

Why it is important to know

Understanding the concept of an optional final payment is important for individuals considering car finance options, specifically those interested in PCP agreements. The optional final payment provides flexibility to the borrower at the end of the agreement. They have the choice to either make the final payment and keep the vehicle or return it to the finance company without any further obligation, subject to mileage and condition restrictions. The optional final payment affects the total cost of ownership and future ownership options for the borrower.

Example in car finance

Suppose an individual enters into a PCP agreement for a car with a three-year term. The finance agreement includes an optional final payment of £8,000. At the end of the agreement, the individual has three options 1) Pay the optional final payment of £8,000 to own the vehicle outright, 2) Return the vehicle to the finance company without any further obligation (subject to mileage and condition restrictions), or 3) Trade-in the vehicle and use any equity towards a new finance agreement.