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. Typically this means taking out a Hire Purchase contract. As this would be Hire Purchase - rather than PCP - there is no large optional final payment needed at this stage - 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 that will add more interest to the bill if you go on to refinance it at the end of the contract.
With that in mind, if you know you want to own the car and can afford the higher monthly payments with Hire Purchase, considering taking out a Hire Purchase contract to begin with. By trading in your car at the end of a PCP agreement, you can ensure a seamless transition from one car to another. Any good car retailer 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.
Any good car retailer should be able to settle the finance on your behalf and arrange another finance agreement for your next model. However, 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. 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, 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 agreement.
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. BuyaCar team Oct 13, Which type of car finance is best? Search all car deals with finance. Returning a car What happens Potential charges Avoiding charges Fair wear and tear Disputing charges. Trading in your car How it works Buying a different brand Cars with high values Cars with low values.
Buying your car Refinancing Checks and charges Selling the car yourself. Search all car deals. Deposit and delivery. Monthly payments. A PCP is a little more technical, though, and takes some understanding. All cars naturally lose value over time which is referred to as deprecation. What you pay under a PCP agreement essentially covers the depreciation experienced during the agreement.
You can shop around to get the best interest rate, but the GMFV is likely to be the same wherever you go. Exceeding the mileage limit is allowed but will incur an additional charge. This could be between 5p and 10p a mile, which can quickly add up.
Depreciation is most severe in years one and two, but starts to level out by the third year. For example:. Opting for a larger monthly payment can give you a little flexibility if your situation should change. If, in nine months time, a new car launches that you simply had to buy and you want to part-exchange your car. In reality, there are usually fees payable if you want to part-exchange or pull out of a finance arrangement mid-term. But the example still illustrates the added flexibility that minimising your deposit can give you in the long run, making it far less financially painful if you choose to change your car early.
This is one of the three options you have when your PCP contract elapses. PCP deals are usually taken out over three years, although 24 and month agreements are also available. At the end of the contract, your three options are:. This could lead to you having less money for the next deposit contribution than you thought. If the car is worth more than the GMFV, you can use the extra as the deposit on a new finance deal for a new car.
The deal may look like this:. Claims firms are currently investigating whether consumers have been incorrectly told when taking out a PCP deal that this difference in value is equity, and you can read more about these developments here. Like any contract, a PCP agreement comes with certain stipulations. Most agreements charge between 5p and 10p a mile. This can be expensive, so shop around other insurance providers. Again, these policies are often cheaper from third-party companies.
PCP deals usually come with lower deposits and lower monthly repayments than traditional Hire Purchase agreements, meaning you can get a nicer car for less money up front and less each month. This means you can potentially drive away in a new car every three years or so, without having to come up with a full deposit. Like most PCP agreements, most new-car warranties run for three years. This means that if you switch cars when the PCP deal expires, you never stop being covered by the cast-iron protection offered by a manufacturer warranty.
Another advantage is competition between carmakers and their financial branches is fierce. For some, the idea of making monthly repayments without actually receiving a tangible asset at the end of the contract means PCP deals are unappealing. If you recognise yourself here, investigate a hire purchase agreement. If you want to check the history of a car for free, you can do this for free online using GOV.
If you want to finance a car then a PCP deal is by far one of the most flexible options when it comes to your loan terms. In terms of how long you can finance the car for, this is also pretty flexible as PCP deals can last anywhere from years.
This balloon payment will be significantly more than your other monthly payments for the car, which can price many people out of wanting to own the car. So, if you decide after the first year of your agreement that you like the car and want to own it, you can start saving early in order to afford it.
If you have a poor credit history, you may still be able to finance your new car with a PCP. But lenders will often put higher interest rates in place that make monthly payments for the car too expensive. You can check your eligibility for a PCP deal online for free, without impacting your credit score. This can rise to as much as 70p per mile on more premium cars.
Your excess mileage charge will be stated in your contract when you order your car. Most lenders will understand that things change and can add more mileage to your agreement. They will re-quote your monthly payments accordingly.
This includes any tax, fees and, crucially, the balloon payment at the end. For this reason it can be expensive to cancel your PCP deal early.
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