While regular monthly payments cover most of the amount borrowed, you may come across the term final payment. Understanding what this means is crucial, as it affects the total cost of your vehicle and your options once the agreement ends.
What is a final payment?
In car finance, the final payment refers to the last amount you owe at the end of your agreement. However, what this entails depends on the type of finance plan you have. Some agreements have a standard final instalment, while others require a larger sum, often called a balloon payment, to take full ownership of the vehicle.
Types of car finance and how the final payment works
Your final payment will vary depending on whether you have a Hire Purchase (HP) or Personal Contract Purchase (PCP) agreement.
Hire Purchase (HP)
With HP finance, you spread the cost of the car over a set number of fixed payments. Once you reach the final instalment, you own the car outright. There is usually no large lump sum to pay at the end, but some agreements may include a small option to purchase fee to complete the transfer of ownership.
Personal Contract Purchase (PCP)
PCP finance works differently. Your monthly payments cover part of the car’s value, but not all of it. At the end of the term, you have three choices:
- Make the final payment: Also known as the balloon payment, this is a larger sum required to buy the car. The amount is agreed upon at the start of the contract and is based on the vehicle’s estimated future worth.
- Return the car: If you no longer want to keep the vehicle, you can hand it back without making any further payments, provided it is in good condition and within the agreed mileage limit.
- Part-exchange for a new car: If the car is worth more than the final payment, you can use the difference towards a deposit for a new finance deal.
How to prepare for the final payment
If your finance plan includes a balloon payment, it’s essential to plan ahead. This amount is often significantly higher than your monthly instalments, so having savings in place or arranging alternative funding can help you avoid financial strain when the due date arrives.
For those unsure about keeping the car, checking its market value before the agreement ends can be useful. If it is worth more than the final payment, selling or trading it in could provide extra funds.
What happens if you can’t make the final payment?
Missing the final payment could lead to extra charges or even repossession, depending on the type of agreement. If you are struggling to pay, contacting your lender in advance can help you explore possible solutions, such as an extension or refinancing.
The final payment in car finance is a crucial part of your agreement. Whether it’s a standard instalment or a larger balloon payment, understanding what’s required helps you plan ahead and make informed decisions. Checking your options early ensures you’re prepared, whether you want to own the car, return it, or trade it in for something new.
