What happens at the end of a PCP agreement

A personal contract purchase (PCP) agreement ends with a choice rather than a single outcome. When the contract ends you have three options: buy the car, swap it, or return it¹. The monthly payments you have been making cover only the drop in the car's value over the term, not its full price, so a large sum, called the optional final payment or balloon payment, is left outstanding at the end². What you do about that sum is the decision you face.

The three routes are: pay the balloon payment and buy the car; give the car back; or part-exchange it for a new car³. If you hand the car back at the end of the term, there will be nothing more to pay, provided you have not gone over the agreed mileage limit or damaged the car beyond fair wear and tear². If the car is worth more than the final payment, that difference can work in your favour when you move to another car.

Three choices when a PCP ends: keep, hand back or part-exchange

At the end of the term you either have to give the car back to the finance company or pay a lump sum, known as a balloon payment, to keep it⁷. Most finance companies present this as a set of options rather than a binary choice. Volkswagen Financial Services describes four options at the end of its agreements: return the vehicle, trade it in for a new one, pay the optional final balloon payment plus a £10 option to purchase fee to own it, or refinance the outstanding amount⁸.

The part-exchange route is the one many people take without thinking of it as a decision. You hand the car to a dealer as a deposit on the next one, and any value above the amount still owed is credited against the new agreement. If the car is worth less than the settlement figure, the shortfall can sometimes be folded into the next agreement, though this increases what you owe on the new car.

Which route tends to suit which circumstance depends on the car's value against the final payment. If the car is worth more, keeping it or part-exchanging captures that difference. If it is worth less, handing it back passes the loss to the finance company. The next section explains why.

How the guaranteed future value shapes your options

At the start of a PCP you agree a guaranteed future value with the dealer, based on the car type and how many miles you think you will drive². This figure, also called the guaranteed minimum future value or balloon payment, is how much the dealer thinks your car will be worth when the deal ends³. It is the number the whole agreement is built around.

The guarantee works in one direction only, and in your favour. Volkswagen Financial Services states that the guaranteed minimum future value protects you against depreciation should the market value of your vehicle change more than predicted⁵. In other words, if the used car market falls and your car is worth less than the final payment at the end, you can hand it back and the finance company absorbs the difference. If the car is worth more, you can pay the final payment and keep an asset worth more than you paid for it, or use the difference as equity in a part-exchange.

The guaranteed future value also matters if you end the agreement early through voluntary termination, because it has to be included in the total amount payable when working out whether you have reached the halfway mark¹⁰. The dedicated pages on guaranteed future value and the balloon payment and voluntary termination cover those routes in detail.

Keeping the car: paying the optional final payment

Keeping the car means paying the optional final payment, sometimes called the balloon payment, in one lump sum⁴. With Volkswagen Financial Services agreements, you also pay a £10 option to purchase fee on top of the balloon payment to become the owner⁵. Once that payment is made, the car is yours outright.

If you want to keep the vehicle but cannot or do not want to settle the balloon payment in one go, you may be able to refinance the outstanding amount⁵. Porsche Financial Services and SEAT Financial Services both offer this route on their PCP agreements¹¹. Refinancing turns the balloon into a new borrowing arrangement, which will carry its own cost over time, so the total you pay for the car ends up higher than paying the balloon outright.

To see how the numbers work, Zopa gives an example of a £10,000 car financed over three years with a 10% deposit and an agreed 30,000 miles: Zopa guarantees the car will be worth at least £4,000 after three years and sets that as the optional final payment¹². The size of the balloon depends on the car and the mileage you agree, which is why two people buying the same model can face very different final payments.

Handing the car back with nothing more to pay

Handing the car back is the option that makes a PCP different from a hire purchase agreement. You can hand the car back at the end of the term with nothing more to pay if you have not gone over the mileage limit or damaged the car². Experian puts the same condition another way: there will not be anything to pay, providing you have honoured the terms of the agreement and the car is not damaged³. Halifax states that if you return the car and it is in good condition, you will not need to pay anything else¹³.

Some finance companies charge a small fee for the return itself. Volkswagen Financial Services agreements ask you to return the vehicle and pay a £10 option to purchase fee, which is the administrative cost of exercising the return option⁵. Check your own agreement for the equivalent figure, because it is a fee for ending the deal, not a penalty.

This is also the point at which the guaranteed future value does its work. If the car has fallen in value below the final payment, handing it back means the finance company, not you, takes that loss. That is the trade-off for the lower monthly payments you enjoyed during the term, since those payments only covered the car's depreciation¹⁴.

Where you can still be charged: mileage and condition

The promise of nothing more to pay has two conditions attached, and both are set at the start of the agreement. First, you agree an annual mileage limit when you take out the PCP; the lower this is, the lower your monthly payments, because the finance company expects the car to be worth more at the end³. If you exceed the agreed mileage limit, you pay excess mileage charges³. Zopa states plainly that if you go over the limit, you will need to pay an excess mileage fee when the agreement ends¹².

Second, the car must be returned within the industry's fair wear and tear guidelines. Volkswagen Financial Services makes its return option subject to being within BVRLA wear and tear guidelines, with charges applying for any excess mileage¹¹. Experian notes there are fees for damaging the car or going over your mileage limit¹, and Halifax confirms charges may apply if you go over the agreed mileage limit and want to return the car¹³.

Both conditions are worth watching during the agreement, not just at the end. If you are running well over the mileage limit with a year to go, the excess charge can be substantial, and it may be cheaper to settle the agreement early or part-exchange than to carry on. The page on charges when you return a car at the end of PCP covers the detail.

What fair wear and tear allows: dents, scratches and chips

Fair wear and tear is the standard your car is measured against at handback, and it is more generous than many people fear. Bank of Scotland's car finance guidance, which follows the industry standard, sets out what is acceptable: scratches and abrasions up to 25mm where the primer or bare metal is not showing, and minor scuff marks or scratches up to 25mm on lights and lamps⁶. On wheels and wheel trims, minor scuffs and scratches up to 25mm are acceptable, providing the moulding or trim is not broken, cracked or deformed⁶.

Volkswagen Financial Services states that all its vehicle handback inspections are done to the independent industry standard set down in the BVRLA Fair, Wear and Tear Guide¹⁵. That guide is the reference point most finance companies use, so the standard is broadly the same whichever lender you are with.

The distinction that matters in practice is between damage that is part of owning a car for three or four years and damage that goes beyond it. A stone chip or a light scuff from a car park is wear and tear; a dent with paint damage, a cracked bumper or a torn seat is not. Volkswagen's damage charges guide is blunt about the consequence: all major damage should be repaired prior to the inspection, and failure to do so will result in higher damage charges¹⁵. Repairing damage before handback, using a repairer whose work will pass inspection, is nearly always cheaper than letting the finance company charge for it.

Tyres and wheels: at least 1.6mm of tread

Tyres are one of the most common sources of end-of-contract charges, and the standard is the legal one. The minimum legal tread depth for a car tyre is 1.6mm, which must be maintained across the central three quarters of the breadth of the tread in a continuous band for the full circumference of the tyre, and this includes the spare⁶. A tyre worn below that at handback will be charged, and a tyre close to the limit at the start of your final month may not make it to the inspection.

Wheel damage is charged on a sliding scale by size. Volkswagen's damage charges guide lists alloy wheel replacement charges by tyre diameter: £150 for wheels up to 14 inches, £300 for 16 inches, £420 for 18 inches, £480 for 19 inches, £600 for 21 inches and £660 for 22 inches or above¹⁵. Replacement tyres are charged at £114 for a 16 inch size, £126 for 17 inches and £156 for 19 inches¹⁵. These are one finance company's figures, but they show the order of magnitude: a set of worn tyres and scuffed alloys on a large-wheeled car can add up to a four-figure bill.

The acceptable standard for scuffs is the same 25mm rule as elsewhere: minor scuffs and scratches up to 25mm are fine as long as the moulding or trim is not broken, cracked or deformed⁶. A cheap wheel refurbishment before handback is usually far less than the replacement charge.

The end-of-contract inspection and what it checks

Before the finance company accepts the return, the car is inspected. The inspection checks the car against the BVRLA fair wear and tear standard, the agreed mileage, and the presence of the items it should have: keys, manuals, accessories and the service record¹⁵. Volkswagen's damage charges guide lists charges for missing items, which shows what the inspector is counting: a replacement key at £228, a locking wheel nut key at £54, a parcel shelf strap at £24, a parcel shelf at £336, a satellite navigation unit at £360 and an EV or hybrid charging lead at £354 each¹⁵.

The service record is checked too. Volkswagen charges £60 for a missing service history record and £50 per service missed for incomplete service history¹⁵. Keeping the stamped service book or printed record, and completing any overdue service before handback, avoids a charge that is entirely within your control.

The inspection usually takes place at your address or at a collection point, before or at the point the car is taken away. Its findings become the basis of any end-of-contract invoice, which is why it is worth being present if you can, and taking your own dated photographs of the car's condition on the day. If the inspection cannot go ahead, for example in bad weather, it will need to be rearranged with the finance company, and your own photos from the original date are your evidence of the car's condition.

Preparing the car for return: service record, keys and accessories

Preparing for handback is mostly about avoiding charges for things that cost nothing to fix. The practical checklist is short:

• Keys and locking wheel nut key: a replacement key is charged at £228 and a locking wheel nut key at £54 by Volkswagen¹⁵
• Accessories: the parcel shelf and its strap, the satellite navigation unit and the EV or hybrid charging lead are all on the missing items list, at £336, £24, £360 and £354 respectively¹⁵
• Service record: a missing record costs £60 and each missed service £50¹⁵
• Fuel or charge: the guidance does not set a rule on fuel or battery level, but returning the car as you received it is the safest standard
• Condition: major damage repaired before the inspection, tyres above 1.6mm of tread, and the car clean so that damage can be seen and assessed⁶

Halifax summarises the end-of-term position simply: return the car at the end of your term, or pay a lump sum to keep it¹⁶. The return route is the one that needs preparation, because every missing item and every piece of unrepaired damage becomes a line on an invoice.

End-of-contract charges: invoices and how to query them

After the inspection, the finance company sends an invoice for any excess mileage, damage outside fair wear and tear, and missing items or services. The charges can be significant. Volkswagen's guide gives a repair and refinish charge of £120 for small components including front and rear bumper spoilers, roof spoilers and A, B or C posts, and £72 for repairing small areas of damage to interior carpets and trim or upholstery¹⁵. Excess mileage charges are worked out from your agreement's own pence-per-mile rate, which is set when you sign.

If you disagree with an invoice, query it in writing with the finance company as soon as it arrives, keeping copies of everything you send. Ask for the inspection report, photographs of the damage being charged, and the basis of each charge. Your own dated photos of the car at handback are the evidence that settles most disputes. A template letter from Which? for disputing damage, written for a garage context but adaptable, sets out the approach: state what you dispute, give evidence, and say what you want done¹⁷.

If the finance company does not resolve the dispute, you can complain to the Financial Ombudsman Service, which looks at complaints about finance companies for free. Citizens Advice explains how to check whether a financial firm has followed the rules and how to take a complaint further¹⁸. The page on complaining about a lender or finance company covers the process step by step.

One warning about arrears: if charges go unpaid and the account falls behind, the position worsens. Business Debtline's example hire purchase agreement shows £1,495 owed where the creditor ends the agreement¹⁹, and the finance company may pursue the debt. If you cannot pay an end-of-contract invoice, contact the finance company before it becomes arrears, and take free debt advice from a charity such as StepChange or National Debtline.

What protects you, and where it stops

The strongest protection in a PCP is the guaranteed future value itself: you are protected against depreciation should the market value of your vehicle change more than predicted⁵. If the car is worth less than the final payment, you hand it back and owe nothing more, subject to mileage and condition. No other car finance product gives you that one-way bet.

The Consumer Credit Act 1974 gives you the right to end a PCP agreement early and hand the car back, known as voluntary termination, once you have paid at least half of the total amount payable¹⁴. Advice NI notes that voluntary termination gives a relatively clean break: you give the car back, there are no further payments or penalties, and it will not hurt your credit score¹⁰. You cannot use it if the lender has already defaulted the account¹⁰.

Where protection stops is at the two conditions of return: mileage and condition. Excess mileage charges and damage charges are contractual, not penalties, and the ombudsman will generally expect you to pay charges that are properly assessed and evidenced. There is also a limit on what the finance company can do with money in your accounts if you fall into arrears: the Financial Ombudsman explains the rules on a bank's right of set-off, where a firm can use money in one account to cover a debt on another, and the conditions it must meet first²⁰.

If your financed car is written off during the term, a different set of rules applies: the ombudsman has said that in those circumstances an insurer should provide a new vehicle replacement as long as it was agreed with the finance company²⁰. The page on if your financed car is written off covers that. For everything else at the end of the agreement, the pages on personal contract purchase, PCP or hire purchase and car finance set out the wider picture.