What happens at the end of a PCP term? Guide for everyone

Unlike many other forms of car finance, PCP deals offer a great deal of flexibility at the end of the term. Under these agreements, you have three options to choose from - buy, return, or trade. The options are self-explanatory. However, each has different implications: from needing to make the final balloon payment to signing up for another round of monthly car payments.

Having multiple choices is convenient but forces you to look deeper into the topic. With this article, we want to help you make an informed decision at the end of a PCP contract. As long as you think ahead of time, you’ll be well-prepared for the outcome of your choosing.

How does PCP work?

PCP (Personal Contract Purchase) is a type of car finance deal where you pay monthly instalments to use a car for a certain period. The agreement is usually signed for two or three years, but it depends on the financing company.

You don’t need to pay the car’s full worth. You only have to pay for the difference between the car’s value at the start of the agreement and by the end of it. The deposit contribution and monthly payments basically cover the value the car is assumed to lose during the finance agreement.

The proposed residual value of the car is known as GFV (Guaranteed Future Value) and depends on:

• The manufacturer and model of the car
• The type of fuel it runs on
• Estimated annual mileage
• Duration of the agreement

GFV is calculated by the financing company. Before signing the papers, it makes sense to consult with a specialist and do your own research to assess whether the depreciation value is reasonable (plus interest).

What does the end of a PCP mean?

You choose the car, agree on a contract length, mileage limit, and interest rates, make the deposit, and take your car home. But here is what sets PCP apart from PCH (Personal Contract Hire, often referred to as leasing) and Hire Purchase (HP) - you don’t necessarily own the car at the end of the PCP agreement.

You can exercise different options if:

• You want to keep the car;
• You want a different car;
• You don’t need another car.

We’ll cover the options in-depth in the next section. But before we go on, we want to emphasise that you need to set a plan of action way before the contract ends. It’s not to accommodate the financing company but yourself. Make sure you understand all the extra costs involved, as well as all procedures, checks, new contracts, etc.

What can you do at the end of a PCP deal: three options

During the PCP term, the finance company has the property rights to the car. But at the end of the term, you have three options, one of which allows you to transfer ownership from the provider.

1. Buying your car

If you want to keep the car, have enough money to cover the final payment, and the car is worth more than GFV, buying the car is a good idea.

To become the owner, you need to cover the GFV, also known as the balloon payment. This optional final payment is the only major prerequisite for transferring ownership from the lender. From that point on, there will be no monthly payments. The lump-sum can be as much as half the initial purchase price of the car, but it can lower if you made a substantial first deposit and set your monthly payments high.

Because the balloon often runs into the thousands, make sure it’s worth it for you. You can make a profit if the vehicle finance company’s estimations were off. Bear in mind that they can only guess what the car will be worth when the contract ends. If they underestimated the car’s worth at the time of you buying it out, you’re in luck.

How to refinance the final payment

If you don’t have the cash for the final payment, you can get help from a lender one more time and refinance the balloon payment. In most cases, it’s done through an HP contract as HP doesn’t require you to make lump sum payments at the end. Under this agreement, you will become the owner of the car as soon as you repay the amount borrowed and some lenders will ask for a small purchase of £50.

If you intend to keep the car before you sign up for PCP, consider going for HP instead. Not only will it be easier to arrange (no extra contracts), it will normally take you less time to become the owner.

Checks and charges

The financing company will no longer be interested in the condition of the car. It’s you who will be responsible for the car, so any vehicle checks you want to make are for your own sake. Don’t worry about mileage or damage charges unless you’re returning the car.

Can you sell the car?

Yes, it’s your car! Once the purchase is finalised, you can do whatever you want with the car. Make sure the selling price is more than the initial deposit + all monthly payments + the balloon + interest. Unless your plan was to lose money all along.

The sale can be arranged through the same car retailer. They normally don’t mind sorting out the outstanding balance, settling the finance on your behalf and returning the surplus to you. What to do with the surplus is up to you.

2. Returning the car and walking away

Your next option is simply driving the car back to the lender. If you have been a responsible driver (all agreements were met) and made all your payments (in time and in agreed amounts), you’re free to walk away. This is what most people with PCP do.

Bear in mind that while you save money on the balloon payment, you will be leaving with no capital. For you, the end of the PCP contract will essentially be the end of the car rental term. If you plan to purchase or finance another car, you will start from ground zero.

When returning the car is a good idea

The most common scenarios where you’d benefit from returning a car to the lender are:

• The actual value of the vehicle is less than estimated (GFV);
• You no longer need a car;
• You’re about to move or travel a lot;
• The car is in line with mileage, servicing, and condition requirements (or you don’t mind paying the extra).

When returning the car is a bad idea

Here is when returning is less than ideal:

• The actual car value is substantially more than estimated (GFV)
• You haven’t met mileage, service, and condition requirements and can’t afford or don’t want to pay the charges.

Potential charges

Of course, the dealer doesn’t want to receive the car back in a worse condition than expected. The most common things that get people in trouble are:

• Excess mileage - The acceptable mileage is specified in your contract; it can be anywhere from 6,000 to 30,000 miles per year. Lenders typically can charge 4p-72p per mile for excess. If you exceed the mileage the first year but travel way less the second year, you can come below the limit. This is because the mileage is only checked at the end.
• Excessive wear or damage - You can face penalty charges if there are scratches and cracks in glass, holed lenses, dents on high-profile panels, stained upholstery, etc. But you don’t have to return the car in pristine condition; there are acceptable vehicle return standards.
• Missing documentation - If you lose your V5C logbook and the car key, you’ll need to pay for a replacement.

How to avoid the charges

Let’s start with the mileage. If you can already tell you’ll exceed the pre-agreed amount, it’s worth letting your lender know in advance. It may cost you a bigger monthly payment, but not only will it be spread out across many months, but it will also likely be significantly lower than a penalty.

If you want to catch and fix damages before it gets out of hand, commit to regular car inspection, e.g., every ten weeks. If certain car parts get unusually bad wear, ask the mechanic what causes it. Also, find reliable specialists that won't get into more trouble with a bodged job.

Finally, as for replacements, order them yourself. The finance company will definitely charge you more than the actual replacement costs. Any missing kit should be available online or at the official dealership.

3. Trading in or part-exchanging your car

In this section, we’ll use trade-in and part-exchange interchangeably. The only subtle difference between them is that part-exchange always implies putting the proceeds from the previous car towards a new one; trading in can be done at a profit.

Earlier, we talked about the arrangement, where you buy out the car on finance to sell it later. With part-exchange, you don’t need to organise these steps separately.

How does it work?

A trade-in ensures a smooth transition from your current car to a new one. Ideally, you want to have positive equity to use towards a new car. But if you have remaining finance on the car, you’ll need to settle that first. If you are not able to do so the other choice is to add the negative equity on your new finance deal if you are looking to finance the new car with an HP agreement.

The easiest way to trade in a car is through the same retailer. You can even set up a new finance option that’ll allow you to continue payments without any disruptions. You'll simply drop off one car and leave in another car (with some paperwork in between).

Of course, the dealership will ask you to pay for the convenience. They’ll likely assess the car below market value to cover further expenses, such as repairs and MOT tests.

Consider this:

• A new car costs £10,000, and the trade-in value of your current vehicle is set at £3,000. The £7,000 difference will be the pay-off amount.
• Another dealer may calculate a lower trade-in value - £2,500. If you think it’s a bad deal, it’s not always is. They can sell you a new car (the same model) for £9,000. This means you’ll have only £6,500 to pay off!

Can you trade in a car at a different manufacturer or retailer?

Yes, in the example above, we’ve shown you that it can be a lucrative opportunity. Most retailers should help you with settling your PCP agreement and arranging a different contract for a new car.

However, it doesn’t mean that all manufacturers will accept all cars. Ask a car expert to figure out the best possible terms.

Trading in a car with positive equity

If a car has a £10,000 trade-in value and you only owe £5,000, this means you have £5,000 worth of positive equity.

Having a surplus by the end of the PCP term is definitely an advantage. If you’re buying the new car with cash (so to speak), it’ll cost you less. If you finance the new car too, the benefit is still there. The more money you deposit initially, the lower the following monthly payments will be; alternatively, you can shorten the contract term. Think of it as another reason to take care of your existing car and keep its value as high as possible.

Trading in a car with negative equity

If a car has a £5,000 trade-in value, but you owe £6,000, a negative equity amount of £1,000. This amount must be paid out of pocket before you can go on.

This is not the smartest move. If you cover the negative equity, you potentially lose any value that you’d get through trading in. The best decision money-wise is returning the car at the end of the term (like in option #2) and financing the new car separately. It’s the lender who will deal with negative equity.

Is it worth buying a car after PCP?

You could turn a profit when buying out your car if you:

• Went way below your mileage limit;
• Kept the car in a really good condition;
• Invested your own money (new parts, customisation);
• Can save money due to new legislation (e.g., a new emissions tax);
• Have a limited-edition model that holds its value really well.

Takeaway: when the PCP contract ends

A few words about ending PCP early: it is possible. It can be done through voluntary termination or early settlement, which is another story. But be prepared to pay extra. For example, if the finance settlement figure was estimated at £10,000, you’ll need to clear the negative equity. If you want to end the contract early and keep the car, you will need to make a substantial final payment.

Hopefully, this article cleared out a few questions for you. Here are the main points you should take from it:

• Buying the car = Making the balloon payment to take ownership (refinancing is optional)
• Returning the car = nothing left to pay as long as the car has fair wear and travelled below the agreed mileage limit
• Trading in the car = a new finance scheme (depends on the value of the new car)

There are other ways to finance your car purchase that may suit you better than PCP. Let us know about your situation or get a quote on our website. In any case, make sure to do thorough research on all options available to you.