If you have a car on a Personal Contract Purchase (PCP) deal, you will know that at the end of your agreement, you will have a final balloon payment, also known as the optional final payment, to make if you wish.
There are several options available when you get to this point in your deal, and we're here to help you make an informed decision to best suit your needs and budget.
PCP deals are the most popular type of car finance in the UK as they allow you to make fixed monthly payments at a lower cost. You only pay the balloon payment at the end if you want to own the car fully.
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It's flexible and allows you to switch into a new car every few years, or make the balloon payment and own the vehicle outright.
However, what happens if you want to pay the balloon payment at the end of your PCP and own the car, but don't have the cash to do that all at once? We look at the refinancing options available to help you decide what's best for you.
Refinancing a balloon/final optional payment
Although in principle, a PCP finance deal sounds simple, particularly in the end where you can pay the balloon payment to own the car, many people don't have the funds to be able to stump up all of that cash in one go.
Depending on the initial price of the car, your agreed term, and monthly repayments, the balloon payment could end up being around half the cost of the initial car value. A £15,000 car with a 1,500 cash deposit, paying £150, could see the final payment be as much as £7,500.
Whether you love the car and don't want to give it up, can't find another car suitable or of good enough value, or you want to save yourself the hassle of finding a new car and getting into a new finance agreement, you could look at refinancing to help you achieve this.
If your car is reasonably new - around four or five years old - you can often refinance the balloon payment with another PCP deal. This option would involve a new PCP deal with a lower balloon payment to own the car.
On a Hire Purchase (HP) deal, you make all of the agreed monthly repayments and own the car outright at the end regardless. This type of finance also allows you to finance much older cars with greater mileages.
Refinance via PCP
If you opt to take this route, you should be able to drastically decrease your monthly repayments, thus saving you money, assuming that you are taking out the same deal length.
With inflation and the cost of living crisis rumbling on, this is a perfect option for those that want to keep their car, don't want to spend a large sum of cash outright at the end of their current PCP, and want to save money.
Taking this option could mean that your £7,500 balloon payment now is actually £3,000 in four years' time, and from there, you can decide whether you want to pay that to own the car, hand it back and find something else, or refinance again to reduce costs further over time.
Refinance via HP
If at the end of your current deal you'd like to refinance but know you definitely want to own the car outright at the end of it without making a balloon payment, then an HP refinance deal may be your best option.
Although you would pay more per month than refinancing via PCP, you'd pay less interest and be guaranteed to own the car once the agreement was complete.
Both the PCP and HP refinance options are good, but ultimately it comes down to your personal situation, what you can afford, and whether you want to own the car outright.
Refinance via Personal loan
If you didn't want to take the more traditional route of car financing with an HP or PCP, you could take out a personal bank loan, so you're making the repayments to your bank as opposed to a finance lender.
This option is suited for those with a high credit score as you could take advantage of lower interest rates, and the car will already be yours. However, the risk is much higher if you fail to make a payment. Your home, and other valuable parts of your estate, could be repossessed in addition to your car.
The chances are you will get a better deal with a PCP or HP deal, especially after just finishing a PCP; going with the same lender will likely mean they give you some discount knowing that you are able to make your monthly repayments without any problems.
Should you refinance or hand back the car?
It's a big decision to make; you need to properly do your research and think about what's best for you before committing to anything. Compare the car's current value to how much it would cost to refinance and subsequently purchase it over time.
If your car is worth less than the balloon, you could consider handing the car back and taking finance out on another vehicle. It could be the same make and model if you really wanted it to be.
If your car is worth more than the balloon, you may be better suited to refinance or pay the balloon, which would cost less than taking out new finance on another car.