If you are approaching the end of your Personal Contract Purchase (PCP) agreement and are considering settling a PCP agreement early, or looking at refinancing the balloon payment, hire purchase (HP) car finance could help.
HP car finance could help you keep the vehicle at the end of the agreement. This guide will show you how to refinance PCP.
What is a PCP balloon payment?
A PCP agreement allows you to pay lower monthly instalments by letting you repay a large portion of the car's value, known as the balloon payment, at the end of the contract.
But, this still means at some point you have a big cost to pay if you want to keep the car.
Usually you have three options:
- pay the balloon payment to own the car;
- return the car to the dealer; or
- trade the car in for a new one.
But, there is a fourth, possibly more affordable option you may not have considered:
4.HP car finance.
Can you refinance PCP balloon payments?
Yes. Some lenders, such as AutoMoney Motor Finance, offer to refinance PCP balloon payments on your current vehicle. Your PCP provider should provide a settlement figure, detailing the remaining balance owed to buy the car from them. This PCP early settlement figure will need to be provided to AutoMoney Motor Finance, or any other finance provider you speak to about refinancing your balloon payment.
Benefits of the refinance PCP balloon payment option
Spread the cost: Refinancing allows you to spread the balloon payment over a longer period, making it more manageable.
Retain ownership: By refinancing, you can keep the vehicle without having to pay a large lump sum at once. Please note however, that you will not own the vehicle until the HP agreement is paid in full.
Straightforward process: Since you already have the vehicle in your possession, you can skip searching for a new vehicle online or at any local dealerships.
Important considerations when refinancing a balloon payment
When looking to refinance PCP balloon payments with a HP agreement, there are several factors to consider:
Overall cost: If you choose to take out additional borrowing, while it can make monthly payments lower it does mean that you are continuing to pay interest on your borrowing, so the overall cost of the car will increase.
Interest rates: The interest rate on your refinance loan may be higher than the PCP finance interest rate you were previously paying.
Loan term: The length of the loan term will structure your monthly payments and the total interest paid over the life of the loan. Choose a term that balances affordable monthly payments with the overall cost.
Fees and charges: Be aware of any fees associated with refinancing, such as arrangement fees or PCP early settlement charges.
Financial situation: Assess your current financial situation to ensure that you can comfortably afford the monthly payments on the refinance loan.
Vehicle depreciation: Think about how much the car is worth now and how quickly its value will decrease over time. Make sure the loan amount is not more than the car's value. If it is, you might end up owing more than the car is worth if you decide to sell it before paying off the loan.
What is the difference between Hire Purchase and PCP?
PCP and HP are both viable options for financing a vehicle, but they operate in different ways. Here’s a look at the differences between a HP agreement and a PCP agreement:
How HP car finance works:
Ownership:
Initial ownership: The finance company owns the car during the agreement.
Final ownership: Ownership is transferred to you once all payments (including the option to purchase fee) are made. There is no balloon payment at the end of a hire purchase agreement.
Payments:
Deposit: While some finance providers may require a deposit for a new finance agreement, others, like AutoMoney Motor Finance, offer zero deposit finance options.
Monthly payments: You will pay fixed amounts over an agreed period (usually 3-5 years). The monthly payments cover the total cost of the car plus interest.
Total cost:
The monthly payments are higher compared to PCP, because you're repaying the entire car's value rather than just covering the depreciation (reduction in value) of the car during the agreement period.
Interest:
Interest is charged on the total amount borrowed. The rate can be fixed, like with AutoMoney Motor Finance, or variable.
Mileage and wear:
Mileage: There are no annual mileage restrictions.
Wear and tear: There are no additional charges for wear and tear, as long as you meet the basic maintenance requirements.
Flexibility:
Early repayment: Hire purchase early settlement options allow you to request a settlement figure and pay back the borrowing at any time through the agreement, though some finance providers might charge an early repayment fee. AutoMoney Motor Finance does not charge a fee like this.
Car ownership: Settling your car finance early will allow you to own the vehicle outright, before the agreement comes to an end.
Repossession:
The finance company can repossess the car if you fail to make payments. Until the agreement is settled in full (including the option to purchase fee), the finance provider retains the legal title to the vehicle (they legally own it).
How PCP car finance works:
Ownership:
Initial ownership: The finance company retains ownership of the car throughout the agreement.
Final ownership option: You have the option to buy the car by making a large final payment (balloon payment) at the end of the agreement.
Payments:
Deposit: This is usually around 10% of the car’s value.
Monthly payments: Can be lower than HP, because you’re only covering the depreciation (reduction in value) of the car during the agreement period, not the full value.
Final balloon payment: A large payment at the end if you decide to buy the car. This payment reflects the car’s Guaranteed Minimum Future Value (GMF).
Interest: Interest is charged on both the loan amount and the balloon payment.
Mileage and wear:
Mileage: There are mileage restrictions (e.g. 10,000 miles per year). Exceeding these limits incurs additional charges.
Wear and tear: The car must be returned in good condition. Excessive wear and tear will incur additional charges.
End of agreement:
Return the car: You can hand the car back with no further costs (subject to mileage and condition).
Buy the car: You can pay the balloon payment to own the car.
Trade-in: If the car is worth more than the balloon payment, you can use any equity (portion of the car that you own, compared to the amount the lender owns) as a deposit for a new PCP deal.
Flexibility:
Early termination: You can end the contract early, but there might be fees, and you may still owe money, if the car’s value has reduced more than expected.
Repossession:
The finance company can repossess the car if you fail to make payments, and additional fees may apply if the car’s value doesn’t cover the remaining finance owed.
Steps to refinance PCP balloon payments
- Get a settlement figure: Tell your PCP provider that you intend on settling your car finance early. Get the settlement figure from your PCP provider. This figure will include the balloon payment and any remaining balance on your current finance agreement.
- Apply for car finance: Once you've chosen a lender, submit your application for refinancing. You'll need to provide details about the vehicle, the PCP early settlement figure, and your personal information. Some finance providers may have specific requirements for refinancing a PCP balloon payment, such as a valid MOT. It is always best to speak with the finance provider beforehand, to understand any requirements.
- Review the agreement: Carefully review the terms of the refinancing agreement before signing. Ensure you understand the interest rate, monthly payments, loan term, and any fees. Make sure you can afford the costs involved.
- Complete the process: Once approved, the new lender or finance broker will pay the PCP settlement amount which will close your agreement. You will then begin making payments on the new hire purchase agreement.
Refinancing your PCP balloon payment can provide a more manageable way to keep your vehicle and spread the cost over a longer period. Ensure you thoroughly research and compare your options before making a financial decision.
Interested looking for a refinance on a PCP balloon payment? For more information, speak with one of our dedicated sales agents today on the freephone number above, or click through to apply for hp car finance now.
Representative example
You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).
Total amount repayable will be £17,897.60.
29.3% APR, annual interest rate (fixed) 24.7%.
This example uses the representative APR. This is the rate at least 51% of customers are expected to get.
Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.
FAQs
Refinancing a PCP agreement means replacing your current finance arrangement with a new one, typically to either reduce monthly payments, secure a better interest rate, or extend the repayment term.
Yes, you can refinance your PCP agreement at any time, though early termination fees and settlement charges may apply.
Refinancing typically involves keeping your current car. If you want to change cars, you might consider ending your current PCP agreement and starting a new one for the new vehicle.
Yes, but your options may be limited and interest rates may be higher.
Yes, you can refinance even if your car has high mileage, but high mileage may affect the car's value and the amount you can refinance. Some lenders may have mileage restrictions or may offer different terms for high-mileage vehicles.