What are the options at the end of your car finance deal?

Most car finance terms last for between two and five years, and one of the key differences between the various types of loan involves what happens at the end of this period.

In some cases, the finance is simply paid off and the borrower has nothing to worry about. But in other cases, there are potentially tricky decisions to be made.

Personal loans

If you borrow money through a personal loan, your position at the end of the finance period is very straightforward: your monthly repayments automatically come to an end and there is nothing else to think about.

You could decide to trade in your car at this point and perhaps borrow more money in order to get a more expensive vehicle – it should be easier to obtain fresh finance now that your previous loan has been paid off. But because a personal loan was used to buy the car in the first instance, you have been its legal owner since you made the purchase and have therefore been able to sell at any time you wished.

Leasing

A lease or personal contract hire arrangement is simply a form of long-term rental: at the end of the period, the car is simply handed back to the leasing company.

At this point, customers may choose to start a new lease on a different, perhaps newer, vehicle. The lender may also make the original car available for purchase, but this is not always guaranteed.

Hire purchase

The aim of a hire-purchase agreement is for the borrower to make monthly payments over a certain period, at the end of which they become the legal owner of the car. At this point, a small “transfer fee”, perhaps of £100 or £200, may be payable in order to complete the transaction.

Customers can then do what they like with their car – they can keep it, or sell it and buy a different model or take out a new finance package if they wish.

Personal contract purchase (PCP)

PCP deals have become one of the most popular ways of financing new-car purchases, and part of their appeal have been the flexibility that borrowers have when the loan period comes to an end.

PCP is similar to hire purchase in that customers pay a deposit and then monthly payments over a fixed term. At the end of this period, however, there are three options:

  • Make a final lump-sum payment – known as a “balloon payment” – in order to buy the car outright. The size of this payment is agreed between the lender and the borrower at the outset, and is related to what the value of the car is expected to be at the end of the loan.
  • Take out another PCP deal, perhaps using any equity – the difference between what the car is actually worth at the end of the deal and what the lender had expected it to be worth – as part or all of a deposit on a new vehicle.
  • Hand the car back and walk away. If the car has depreciated more than expected, the borrower may not want to buy it – and they will have no equity to roll over into a new PCP agreement. As such, walking away may be the most suitable course of action.
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