How to refinance a PCP balloon payment on a car?

Roman Danaev

CEO Carplus

10 min read25 April 2022

If you’ve financed, or plan to finance, a car through a personal contract purchase (PCP) plan, then you have the option of making a final balloon payment to purchase the car from your lenders. For many people, refinancing a PCP car finance balloon payment—that is, taking out another loan to pay it—is often more feasible than paying for it upfront with their own money.

You may have considered refinancing a PCP balloon payment on a car but felt unsure of the process. This article will discuss how balloon payments can be refinanced and whether or not doing so is worth the cost. It will also answer a few commonly asked questions about refinancing balloon payments.

Can a balloon payment be refinanced?

A balloon payment is an optional final payment made at the end of your loan agreement that lets you purchase your car. Balloon payments are greater than your previous monthly repayments; however, they are the reason why the fixed monthly payments for your car were so low in the first place.

If you are considering paying for your car using car finance with a balloon payment, or if you’ve already done so, you may wonder if it’s possible to refinance a balloon payment. In short, yes, it is! To be eligible for another loan to put towards your balloon payment, you must have a good credit score and a decent income. If you meet these criteria, refinancing is certainly a viable option.

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When is it worth refinancing a balloon payment?

Before you refinance the balloon payment for your car, you should evaluate whether or not it’s worth it in the first place. Perhaps you rely on your car for work and are reluctant to go through the hassle of finding a new one. That’s completely understandable.

However, there is also the cost to consider. Consider the current value of your car in comparison to the total cost of the balloon payment. As a general rule, if your car isn’t worth at least as much as the balloon payment, then it would be better to trade it in for a new car.

On the other hand, if the value of your car is greater than the balloon payment, it may prove a wiser decision to finance the payment.

Can I refinance a PCP balloon payment with the same lender?

If you’re satisfied with their service thus far, you may be wondering if it’s possible to refinance PCP balloon payments with the same bank or lender. In short, the answer is yes.

No matter how good your relationship is with your lender, however, you should make sure you fully understand their refinancing terms before jumping headfirst into a new loan agreement with them. That said, your previous relationship with them should make the whole process a lot faster and smoother. Your lender may even reduce their fees to encourage your loyalty as a client.

How to refinance a PCP balloon payment?

If you’ve considered your options and have decided that refinancing your PCP balloon payment on your car is the best way to go, you may be wondering where to proceed from here. How exactly do you refinance a PCP balloon payment on a car, and what options are available to you?

In this section, we’ll take a look at three different options for refinancing a balloon payment on a car:

  • Refinancing via PCP. This option will significantly reduce the cost of the monthly payments for your car. You would still be left with a balloon payment to pay at the end.
  • Refinancing via Hire Purchase (HP). Through this method, you can avoid a large final payment for your car. Compared to a PCP plan, however, the monthly payments will be higher.
  • Refinancing via a personal bank loan. If you have a good credit score, this is another option worth considering. Through this method, you own the car from the get-go and can potentially make the most of low-interest rates.

To find out a bit more about these three options, read on.

How to refinance via PCP

Assuming you choose the same type of plan—including the length of the contract, deposit amount, and mileage limit—the cost of your monthly repayments should drop significantly. A £20,000 car that cost £265 a month when you financed it as a two-year-old car, might drop to £150 if you refinance the balloon payment with another PCP plan.

At the end of your contract, you will be given another opportunity to make the balloon payment and purchase the car. At this stage, you can either trade your car in, make the payment, or refinance it again.

How to refinance a balloon payment via Hire Purchase (HP)

If you’d rather avoid a large lump sum payment, and understandably so, then HP finance might be a good option for you to consider. At the end of the contract, the car will legally be yours.

So, if you’re reaching the end of a PCP finance scheme but don’t have the funds to make that final lump sum payment for your car, an HP finance deal might be a good choice for you—it’s both simple and reasonably affordable. While PCP boasts the lowest monthly repayment costs, the final payment you’ll be left with at the end will still be quite large.

With an HP plan, you may have to pay a higher monthly fee for your car, but you don’t need to worry about a final balloon payment. What’s more, compared to a similar PCP plan, you’ll pay less interest on HP plans, too.

How to refinance a balloon payment via a personal bank loan

A final option to consider if you have a good credit score is taking out a personal bank loan to refinance your PCP balloon payment on your car. If you meet the bank’s income and credit criteria, this could work out very well for you, as interest rates are lower with personal loans than with car finance schemes. Another benefit of a personal loan is that you own the car the second the payment is made.

That said, there are some things to be wary of when considering a personal bank loan. For example, since personal loans aren’t secured, if you don’t make repayments in a timely fashion, then more than just your car could be repossessed.

Furthermore, PCP and HP schemes sometimes provide better deals, so it’s always worth at least checking out quotes for such contracts when considering whether or not you should refinance a car loan.

Should I refinance my balloon payment or return the car?

Ultimately, whether or not you should refinance a car loan depends on you and your personal circumstances. That said, there are some points you ought to consider when making a decision.

Approaching the situation from a monetary point of view, evaluate the current value of your car. Compare it to the amount of money you’d have to pay towards refinancing it or paying off the balloon payment. If your car is worth less than the total cost of the balloon payment, then it may be time to trade it in for a different model.

On the other hand, if your car is worth more than the PCP balloon payment, then paying or refinancing the balloon payment might be the smarter move. This could be cheaper than purchasing a similar used car.

Many people grow attached to their vehicles. Perhaps your car holds some sentimental value for you, or perhaps it’s simply proved itself very reliable, and you are hesitant to purchase a new one. This is completely understandable. Just make sure that before committing to paying off or refinancing your car’s PCP balloon payment, you’ve considered the issue from all angles.

Summary

Refinancing a PCP balloon payment on a car is a perfectly viable course of action. However, before you commit to doing so, make sure that you choose the right plan for you. You should also consider whether or not it’s worth refinancing the balloon payment in the first place; it may be that your car is no longer worth the balloon payment price. While it’s understandable to feel a degree of sentimentality towards your car, ensure that you make a smart financial decision.

Finally, if you need any more advice on refinancing PCP car payment plans or would like to go ahead with the process, reach out to our experts here at Carplus. We understand how daunting these decisions can be and are here to help!

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