If you exceed the total number of miles agreed, you will incur an excess mileage charge, and this is usually paid in pence per mile at the end of your contract.
Your finance lender will use the mileage figure you expect to drive each year to determine the depreciation value of your car for your term. Therefore, the fewer miles you drive per year, the less your car's value will drop over time.
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You will get charged when your contract ends if you exceed your limit. It's critical that before you take out a car finance deal, you strategically work out how many miles you would typically drive in a year.
This article will look at excess mileage charges in more detail and how to avoid paying them. Each lender will differ in their excess mileage policies, but the best way to avoid paying anything is to consider your usage beforehand.
What are excess mileage charges?
When you take out a loan on a car, whether a Personal Contract Purchase (PCP) or a lease, within your contract, you will have to agree on the total miles you anticipate driving every year for the duration of your term.
The finance company uses the figure you give to determine the car's depreciation value and how much they'll be able to sell the car for once you hand it back to them.
At the end of your contract, if you have gone over the mileage limit put in place, you will be subject to an excess mileage fee that varies in rates between 3p-30p, depending on your lender.
For example, if you take out a four-year deal and agree to drive 10,000 miles in a year, that would equate to 40,000 miles across the term.
You can drive more than 10,000 miles per year, as long as you don't exceed 40,000 at the end. You could drive 15,000 miles one year, 8,000 in the second year, 11,000 in the third year, and then 5,000 in the last year.
How much do excess mileage charges typically cost?
Excess mileage fees depend on the lender but generally will be anything between 3p-30p. Generally, the average charge is 7p-8p but check your contract thoroughly before agreeing to anything.
The lender will charge you based on the total miles exceeded multiplied by the excess mileage charge. If you exceed your agreed limit by 2,000 miles and your excess mileage charges were 7p, you'd be charged 2,000 x 0.07 (7p) = £140.
Of course, this isn't astronomical, so if you exceed your limit by a small amount, hopefully, you will be able to cover the cost comfortably. However, if you exceed 10,000 miles or more, that's when you'll start to see the figures climbing.
How can you work out your annual mileage?
Work out your annual mileage before committing to a purchase. Start by calculating how many miles you do for your daily commute. If it's a 10-mile round trip, five days a week, for the whole year, you can calculate that as 2,600 miles per year.
Then consider what else you use your car for, such as holidays, shopping, visiting friends and family, and more.
It's advisable to overestimate your annual mileage so that you have less chance of exceeding it. You may get a new job in 18 months, and your commute goes from 10 miles per day to 30 miles per day.
The additional cost for increasing your mileage won't be much per month, so for peace of mind, it's worth capping it as high as you think you may need to.
What to do if you are going to exceed your mileage allowance
If personal circumstances change, or you're generally using your car much more than you thought you would need to, and you think you may exceed your mileage allowance, it's worth contacting your lender.
Most lenders will be willing to extend your mileage, known as a mileage extension. Adding more miles to your annual allowance will increase your monthly repayments, and your contract will be adjusted to reflect this.
It's worth reading your contract carefully before signing anything as some companies may not offer a mileage extension, and therefore you could be stuck if you drive more than you had agreed.
How to avoid the excess mileage charge?
The best way to avoid excess mileage charges is to check your mileage often and keep a note at the end of each year of driving how many miles you did in that year.
You should also carefully assess the number of miles you need to do per year for work, holidays, family time, etc. and then add on a couple of thousand extra to cover yourself.
Most lenders will offer 5,000 miles per year as a minimum, rising by 2,000-5,000 increments up to 20,000. You may be able to find some lenders that offer up to 70,000 miles per year if required.