What should you do at the end of a PCP car finance agreement?

Almost all new cars are financed or leased nowadays, with a large proportion sold via a Personal Contract Purchase (PCP) agreement. PCP deals are typically distributed over a two-to-four-year period, with many customers coming to the end of their contracts and finding themselves in a very different car-buying landscape to the one they were in before.

When signing a PCP deal three or four years ago, it was reasonable to think you’d easily get a replacement new car when you needed it, and that the optional final payment (also known as the Guaranteed Minimum Future Value or ‘balloon payment’) would be a little less than the car’s actual value at the end of your contract. That difference or ‘equity’ might typically be used as a deposit to put towards a replacement car on a new PCP. 

However, things have since changed; residual values can be unpredictable at times, while certain types of car, such as EVs, have historically performed poorly with regard to retaining their initial asking price compared to the equivalent petrol or diesel model. This has led many drivers to come to the end of their finance deal with little financial wiggle room.

PCP small print also typically requires you to decide what you want to do three months before your contract ends. Fail to do so, and you could be locked into a less than optimal like-for-like ‘trade-in’ scenario.

With this in mind, many drivers might be wondering what the best thing to do is. While we are not financial advisors at Auto Express – and must stress that every financial situation is unique and should thus be approached accordingly – we have created a rundown of the options available to buyers coming to the end of their PCP finance deal. If you want to leave your finance deal early, we have a guide for that as well.

Option 1: Return the car and walk away

The option of being able to return the car and walk away is one of the main draws for some when it comes to PCP agreements. This is ultimately the easiest solution, as it requires no further payments or agreements. However, there are some downsides.

For starters, while the value of your car may have dropped off a cliff throughout your course of ownership, it may have fared much better than the finance company expected. In this case, handing it back would mean missing out on potentially thousands of pounds in equity if you were to simply pay off the remaining balance then immediately sell the car on.

Of course, handing the vehicle back will also leave you without a car, plus you should bear in mind that any damage beyond reasonable wear and tear (or miles beyond what was stated on your PCP agreement), can be met with additional charges.

Option 2: Make the optional final payment

If you have the cash, making the optional final payment may be in your best interests as, first and foremost, you’ll have a car to drive away in. As mentioned above, you may also be in equity, meaning that if you were to sell the car on, you could actually be better off than you would have been if you’d had simply walked away; Auto Express’ ‘Sell My Car’ service will even help settle outstanding finance if you plan to sell your car, but don’t necessarily have the funds yourself to pay off the balance.

Of course, if you’re not looking to immediately sell your car and don’t have the necessary funds at the ready, the only way to make the final payment will be by taking out a loan, meaning you’ll get a double dosage of interest, while the value of the car will continue to fall.

Option 3: Trade in and use equity

The last option is only possible if you’ve still got equity in the car. If you do, there’s always the option of using that value as a deposit towards your next finance deal. 

Such a move could help bring down the payments of your next car – particularly if you’re able to supply extra deposit funds – and trading in with your trusted dealer could net you some exclusive deals.

Conversely, if you want a new car but the one you’d like is a few months away, you can use the equity as part of a short-term PCP deal to bridge the gap. This does, of course, mean you'll be stuck with your old car for longer and may not benefit as much from used values that could be higher-than-normal at the time.

Buy a car with Auto Express. Our nationwide dealer network has some fantastic cars on offer right now with new, used and leasing deals to choose from...