What to expect at the end of your car finance term
As the end of your car finance agreement approaches, you may find yourself wondering about what’s going to happen next. Whether you’ll hand the keys back or hold them in your hand knowing the car belongs to you all depends on the kind of agreement you have.
Once you’ve made the final payment on your hire purchase agreement, you’ll take full ownership of the car. Until that point, though, the car remains the property of the service provider.
This means that you will be forbidden from making unauthorised changes or upgrades or selling the car during the contract period. However, once the agreed payment (including any applicable interest or fees) has been made in full, the car officially belongs to you.
Personal contract purchase (PCP)
At the end of your PCP agreement, you have three options:
- buy the car
- upgrade to a newer car
- hand it back
If you decide to buy the car, you’ll need to make what’s known as a ‘balloon payment’. This payment equals the full value of the car at the time the contract ends.
This might sound a bit strange, given that you’ve been making monthly payments for the car, but those repayments only cover the difference between the car’s initial price and its expected value at the end of the contract term. They don’t cover the full purchase price of the car. The balloon payment is the equivalent of buying the car outright at its depreciated value.
If you decide to upgrade the car, you’ll enter into a new PCP with the provider, leaving the old car in their ownership. Or if you choose to hand back the car, there won’t be any additional payments or obligations – you’ll simply give back the keys and go your separate ways.
When you buy a car with a personal loan, you take full ownership of the vehicle upon purchase. This is because you buy the car outright with the money you have borrowed from the bank. As such, your repayment obligation is to the loan provider, not the car provider.
Once you’ve repaid the loan in full, including any applicable interest, the loan will be marked as repaid and there will be no additional payments required. You can sell your car or make modifications to it as you please.
When you lease a car, your monthly payments are for the privilege of being able to use it, rather than contributing to the purchase of it. This means that you don’t own the car at the end of the lease agreement.
So you can simply hand the car back and go your separate ways - unless you decide to extend or renew the lease. You are in effect, renting the vehicle for the duration of the agreement.
Will I own the car at the end of the finance term?
This depends on the type of car finance you have. If you had a lease agreement, you won’t own the car at the end of the term. This is because your monthly payments were for the use of the car, not contributions towards its purchase.
If you had a hire purchase agreement, then you will own the car at the end of the term, providing you’ve made all the required repayments. Whereas with a personal loan, you will take ownership from the start.
If you had a PCP agreement, whether you own the car at the end of the term depends on you. You have the option to buy it, leave it, or take out a new agreement. If you choose to buy the car at the end of the term, you’ll have to make a balloon payment, as described above.
Can I end my car finance agreement early?
Whether you can end your finance agreement early depends on the kind of agreement you have. If you’re leasing, have a hire purchase or PCP agreement, you may be able to end the agreement early.
How you can do this and how much it will cost depends on the type of agreement you have and how much you’ve already paid.
- If you have a hire purchase agreement or a PCP, you have the right to end your car finance agreement early at no further cost, under the Consumer Credit Act 1974. This is called ‘voluntary termination’, where you hand the car back.
- You can use voluntary termination as long as you’ve paid at least 50% of the total finance amount (including any interest and fees), and the vehicle is not damaged beyond normal wear and tear. If you haven’t paid off 50% of your total car finance amount and you want to end your contract early, you may need to make up the difference to reach 50% before you can cancel your contract.
- If paying off 50% of the total car finance amount isn’t affordable, you could speak to your PCP or HP provider and ask to cancel your agreement using ‘voluntary surrender’, where the car will be sold at auction. This is usually a last resort, as you will be liable to pay any shortfall in the balance following the sale of the car. Plus, you may incur extra fees and charges.
- If you’re leasing your car, ending your agreement is more difficult. You may be able to use ‘early termination’ to end the agreement before the term, but this will usually involve paying at least half of the remaining costs and isn’t a guaranteed option. In some cases, you may only be able to end the agreement early if you make the repayment in full. Another option could be to speak to your provider to see if they could extend the agreement to spread your repayments, making them more affordable each month. Whether the lender agrees, depends on your circumstances and their criteria.
- If you’ve taken out a personal loan to pay for your car, the only way to end the loan agreement early is to repay the loan in full. However, there may be early repayment charges if you opt to do this. Remember, there is the option to sell your car to contribute towards paying off the loan, if necessary.
Will this affect my credit score?
If you’re unable to make your monthly repayments, whichever kind of finance agreement you have, this will reduce your credit score and affect your ability to get credit in the future. For this reason, opting for a voluntary termination (if you have a hire purchase agreement or a PCP) could be more suitable. Voluntary terminations won’t negatively impact the score or your ability to get further finance.
Whether you’re coming to the end of your car finance contract, deciding to leave it early or just beginning to look for suitable options for buying a car, it’s really important to choose what’s right for your personal circumstances.
Carwow also states “If you haven’t repaid 50% of the total finance amount, you can still end the agreement early by paying the difference. For example, if you’ve already paid back £10,000 and the total finance amount is £25,000 – you’ll have to pay an extra £5,000 to reach the 50% mark.”
If you can’t afford to pay 50% then, you can end the PCP or HP deal early using voluntary surrender. “You can return the car and the HP company will sell it at auction, but if there’s a shortfall it will come after you for the money. There could be extra fees and charges on top too”. So this is a last resort.
Also, if you want to keep the car, you will need to pay a settlement figure to assume ownership – which you can get from your finance provider. Bear in mind, “A settlement figure for HP is likely to be a lot less than one for PCP as your monthly payments are generally higher, and the transfer fee at the end is a lot smaller than the large balloon payment at the end of a PCP deal”.
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