If you're looking to buy a car on finance, discovering which deal type is best for you can be challenging. From Personal Contract Purchase (PCP) to Hire Purchase (HP) and Personal Loan, each type of finance plan has its positives and negatives.
If you want to own the car outright from the beginning and be in control of what you do with it, your best option would be a personal loan. For this type of plan, you borrow and pay off the total amount of the car from the get-go and make monthly repayments to your lender.
If you would prefer to make fixed monthly repayments to your lender and own the car outright once you've made your last payment, then an HP is your preferred option.
Do you have a car on finance and would like to reduce your monthly repayments? Sign up with Car Credible today; we could help you save money on your deal.
If you prefer flexibility and don't necessarily want to own the car outright at the end of your agreement, a PCP could be favoured. Where a PCP and HP differ is that at the end of a PCP, if you wish to own the car outright, you need to make your optional final payment, often known as a final balloon payment.
If you decide you don't want to own the car or can't afford to make the balloon payment, you can hand the vehicle back to the lender and walk away without paying another penny.
You could also use any profit in your car as a deposit on a new car and finance deal to start the process all over again. Whichever finance option sounds best for you, you can be sure that using Car Credible's deal checker to apply for finance will help you find the best offers.
What is a balloon payment?
A balloon payment is a lump sum made at the end of a PCP finance deal if you wish to own the car outright. It's a figure calculated and agreed upon signing the contract at the start.
The figure is significantly larger than any of the monthly repayments you make throughout your agreement; having one allows you to make smaller fixed monthly payments than you would on an HP or personal loan.
While PCP is a good option as it provides greater flexibility and the ability to change or upgrade your car every few years, lenders typically avoid allowing those with poorer credit scores to take them out.
Typically, you will expect to put a larger deposit down on a PCP finance agreement due to the nature of the deal. However, finance companies know that in many cases, the borrower will opt out of paying a balloon payment at the end of the contract.
How is a balloon payment calculated?
The balloon payment is calculated and agreed upon before you sign the contract, so you know what to expect when the agreement ends. It also means that lenders cannot start making figures up to make you pay more than you should.
It is calculated based on the predicted depreciation value of the car you are purchasing, so basically, how much the lender thinks the vehicle will be worth come the end of your contract.
Your lender will work out this figure based on your car make and model, the type of fuel your car uses, the estimated mileage figure that you give at the start of the deal and the length of your contract.
What happens when the balloon payment is due?
When your PCP contract is up, and your balloon payment is due, you have four options:
- Pay the balloon payment to own the car outright and not have to pay any more finance. This option is good if you want to own the vehicle and can afford to make the balloon payment.
- Hand the car back to the lender without paying a penny more. This option is good if you don't want to own the vehicle outright or can't afford to make the balloon payment.
- Part-exchange your car if the value of your vehicle is worth more than the amount you'd have to pay for the balloon payment. This is known as being in a positive equity position, and you can use any profit in your car to put down a deposit on another vehicle.
- Refinance is an option if you wish to own the car outright but can't afford to make the balloon payment. Car Credible works with several finance partners who can offer you this.
Is getting car finance with a balloon payment right for me?
If you are interested in getting a car on a PCP finance plan but are unsure whether it's right for you, you should use Car Credible's car finance calculator to understand what your monthly payments may look like with or without a balloon.
Below, we've put together a couple of positives and negatives to help your decision, but we must stress that you should research before making a final decision.
Pros of getting car finance with a balloon payment
Low or 0% deposit - You could be eligible to get into a PCP finance deal without putting down an initial payment. Although this would mean slightly higher monthly repayments, if you don't have the cash available, you could get into your dream car right away.
Affordable monthly payments - PCP finance deals often offer lower monthly payments than HP or personal loans because you only borrow a portion of the car's total value due to the final balloon payment being in place.
Flexibility - Because you have the balloon payment in place, you have many different options. Whether you wish to own the car outright, hand it back or get into something new, you are in control and can choose the best option for you.
Cons of getting car finance with a balloon payment
The final balloon payment can be expensive - If you know you want to own the car outright at the end, then a different loan option may be better for you. On a PCP, the balloon payment can be high and difficult to afford if you don't have the savings available. Whereas you know you will own it eventually on an HP or already own it with a personal loan.