What happens at the end of a PCP finance agreement?

PCP finance gives you several options at the end of the contract - letting you purchase the car for a pre-agreed amount, hand it back or trade it in for a new one.

Working out the best option isn't always that simple though. Are you better off returning the car and walking away or paying to keep it? Should you trade in the car or refinance? And how do you avoid damage and excess mileage charges if you do hand the car back?

There are several different end-of-contract scenarios with PCP finance, depending upon whether you want to keep the car, trade it in for another model or hand it back to the finance company and walk away.

You have three options:

Buy the car You’ll need to pay an additional lump sum, known as the optional final payment, which was agreed at the beginning of the term. This can be refinanced.

Trade in for a new car It’s possible to trade in the car for a new one with many dealers. If the dealer deems the car worth more than the optional final payment, there will be a surplus that you can put towards the deposit on your next car, reducing future monthly payments.

Return the car Return the car to the lender and you’ll have no more monthly payments to make, although charges for damage and exceeding the pre-agreed mileage limit may be issued. If the car is worth more than the optional final payment, you will probably be better off making that payment to buy it and then selling it privately.

How PCP works

What happens if I decide to hand the car back?

Should you hand the car back at the end of the contract, there are several factors that the finance company will consider, before the contract is complete. Firstly there’s the mileage allowance that you signed up to at the start. Secondly, is the state of the car and whether there is any damage to it. Go over the mileage allowance and cause any damage beyond fair wear and tear and you can expect to be charged for it.

Mileage limits for PCP finance typically start at around 5,000 miles per year and go up to around 30,000 miles. The higher the mileage allowance, the higher your monthly payments. However, be aware that if you go for a lower allowance to access lower payments and then exceed this limit and hand the car back at the end of the contract, you'll be charged anywhere from 3p to 70p for each mile over the agreed limit - depending on whether the car is a common hatchback or a very rare sports car.

Therefore, it's worth being realistic about the mileage limit you choose, because excess mileage charges could amount to thousands of pounds if you go way over what was agreed. Excess mileage charges typically cost notably more than simply going for a higher mileage contract in the first place, so it's worth trying to select an accurate mileage cap to begin with - or contacting the finance company to update your contract terms, if it looks like you're going to significantly exceed your agreed mileage cap.

Be aware of end-of-contract damage charges, too. If you hand back a car that's peppered with scratches and dents that go beyond the typical wear and tear you'd expect for the age of car, it's likely you'll be issued a charge for fixing the damage.

If you plan to buy the car by making the optional final payment, meanwhile, you will not be charged for the excess mileage or damage - because the car then becomes yours. However, this will still affect its value later on should you come to sell it, with high-mileage cars and poor-condition ones being worth less than low-mileage and good-condition ones.

Can I trade in my car with a different seller?

Yes. Few sellers will want to miss out on your business. You can usually trade the car in with a different seller or manufacturer at the end of your PCP deal. They will ensure that the finance is settled, and you will be able to use any equity in the trade-in car as a deposit. They may even value the car more highly, giving you a bigger deposit for your next vehicle. For the best chance of this happening, it's worth keeping the car in the best condition you can and sticking to your mileage limit.

What happens when you return a car?

You’ll need to tell your lender that you are planning to return the car in plenty of time so that they can book an appointment to inspect and collect the car at a convenient time. You’ll need to make sure:

You have the original documents, including the V5C logbook and handbooks

All of the equipment is present, including the spare key, spare wheel and parcel shelf

The vehicle is clean and ready to be inspected outside in the light

The inspection may be postponed if the weather is too poor, or if it’s too dark to be able to conduct proper checks. If the car is dirty enough that it potentially obscures any damage, you may be liable for extra charges.

The car is assessed according to the industry standard fair wear and tear guidelines, published by the British Vehicle Rental and Leasing Association. Your finance company will be able to provide you with a copy.

This sets out the type of damage that is deemed normal for a used car. Small chips, dents up to 10mm, and scratches up to 25mm are normally deemed acceptable. Any scrapes larger than this may result in extra charges.

The level of fair wear and tear expected varies with the type of contract: the longer the contract and the higher the agreed mileage, the more wear and tear will be allowed. A car on a short 18-month contract with a 6,000-mile-per-year limit will be expected to look practically new, while greater wear will be expected with a car on a four-year, 20,000-mile-per-year contract.

Damage or missing items will be marked on a checklist, along with the mileage, and you'll need to sign this to confirm that you accept the findings. You'll be told within four weeks if there is anything more to pay. This can be disputed if you believe any of the charges are unfair. 

Are there potential charges when returning a car at the end of PCP?

As PCP monthly payments are based on an assumption of the car's future value, anything you do that negatively affects this value could result in extra charges to compensate the lender for the value they've lost - if the car they receive back is worth less than it should be. This primarily means the following:

• Excess mileage
  At the beginning of any PCP contract, you'll need to agree to an estimated annual mileage figure. It's worth being as accurate as possible: the higher the mileage estimate, the more you'll pay each month because the car is likely to be worth less at the end - thus increasing the difference between the car's price at the start of the contract and its expected value when you hand it back. However, if you underestimate the mileage and end up exceeding the agreed figure, you will find yourself with penalty charges, which can be as much as 30p per mile or even more in some cases. Mileage is only checked at the end of the agreement and not each year, so you can go beyond the limit one year if you make up for it by travelling fewer miles in subsequent years.
• Damage
  As mentioned above, damage outside of the fair wear and tear standards is likely to result in end-of-contract charges. Charges vary between vehicles and lenders, but some alloy wheel scratches can cost more than £50 to repair, dented bumpers may result in a charge of £100 or more and windscreen chips are typically £20 or more.
• Missing items
  Missing documents or equipment will result in charges, whether it's a V5C logbook (typically you'll have to pay the replacement cost plus an admin charge) or an absent second key, which can cost more than £100 to replace. 

How do you avoid charges at the end of a PCP?

Fail to prepare, and prepare to pay: planning for the end of your PCP term may not be top of your weekend wishlist, but it's likely to be time well spent, as it could drastically reduce any charges you may be issued.

If your circumstances change and it looks like you're going to exceed your mileage allowance during your contract, then it's worth letting your lender know immediately because they may be able to recalculate your future payments to take a higher mileage into account, ensuring that you're not left with a big bill at the end, though you will have slightly higher monthly payments instead. It should work out cheaper overall to change your mileage allowance than simply racking up many additional miles and being billed at the end.

Manufacturers recommend inspecting your car around 10 weeks before the end of the term, looking carefully at each panel and wheel in bright daylight to spot any scratches or dents. You can compare these against the fair wear and tear guidelines to identify any excessive damage. It may be cheaper to get any issues repaired yourself, rather than risking damage charges, but you'll need to use a reputable company to ensure that you don't get fined because of a bodged job.

You can always contact the finance company to gauge the type of charge you're likely to face for any damage and compare that with quotes you get yourself to address issues - if it's cheaper to get any damage fixed yourself you can do that. If not, you can leave it. In some cases, something that looks like damage to you may be accepted by the finance company without fuss as being within the expectations of fair wear and tear.

You're also likely to face charges for missing equipment, such as a spare key or documents. Finance companies typically add admin fees to the cost of replacements, which you won't have if you sort them out yourself. Again, you may want to check the likely cost for any missing kit with the company to see whether you can source replacements for less yourself.

What is fair wear and tear?

The British Vehicle Rental and Leasing Association 'Fair Wear and Tear' standard is used across the industry, detailing wear that is acceptable in a used car and damage that's not.

Inspectors take into account the age and mileage of the car, so older cars won't be expected to meet the same standard as newer ones.

Your finance company will be able to supply a full guide, along with any additional requirements and you should rely on these to work out whether your car's condition is acceptable or not. As an idea of what's included, general points include:

Buying a car at the end of a PCP finance deal

If you want to take ownership of the car, settle the finance by making the optional final payment and the car is yours. Until then, the finance company owns the car. Once you've made the optional final payment - provided the deposit and all of the monthly payments have already been paid - you will become the owner.

Do this and you're free to keep the car, trade it in or sell it, as it no longer belongs to the finance company.

Refinancing

If you want to keep the car but can’t afford to pay the full optional final payment, this can often be refinanced. Typically this means taking out a Hire Purchase contract. Bear in mind that this will mean you don’t own the car until you’ve made the last monthly payment on the Hire Purchase contract, though.

As this would be a Hire Purchase setup - rather than PCP - there is no large optional final payment needed at the end of the second contract; you simply make any deposit, followed by all of the monthly payments and once these are complete, the car is yours.

If you intend to own a car from the start, you'll end up paying less interest overall with Hire Purchase than PCP (provided the contract terms are the same), as you're paying off the balance faster. You also won't face a large final payment. With that in mind, if you know you want to own the car and can afford the higher monthly payments with Hire Purchase, consider taking out a Hire Purchase contract to begin with.

Checks and charges

As you become the car’s owner by making the optional final payment with PCP finance, the condition and mileage of the car don’t matter - as you're not returning the car to the finance company - so there are no additional charges.

There's also no need for any end-of-contract checks, since you'll have taken ownership from the finance company, so it has no further interest in the car once the optional final payment is made.

Selling the car

If the car is worth more than the optional final payment, you’ll probably be better off making this payment to buy the car - if you can afford to do so - and then selling it for a higher amount.

In many cases, you won’t have to find the money upfront because lenders are generally happy for you to sell the car at the end of the agreement - provided you check with them first and declare to any buyer that there is outstanding finance on the car.

It’s simplest to do this through a car retailer, as they can settle the finance on your behalf and return any surplus to you (or you may be able to put it towards a deposit on another car if you want to trade it in for a new one).

Trading in/part exchanging your car at the end of PCP

How it works

By trading in your car at the end of a PCP contract, you can ensure a seamless transition from one car to another. Most car retailers will be able to take your existing car, settle the finance on your behalf and set up a new finance arrangement to avoid any disruption.

It’s normally possible to arrange for a vehicle to be picked up on the same day that another is dropped off, so you don't have to worry about being without a car for any length of time.

Can you buy a car from a different manufacturer or retailer?

It doesn’t matter where you bought your current car or what badge is on the bonnet, you can trade it in for any other new or used model. This means that you needn't feel tied to a specific manufacturer and are free to pick the car that best suits your needs, whatever brand it is.

Any good car retailer should be able to settle the finance on your behalf and arrange another finance agreement for your next model.

What happens if the car is worth more than the optional final payment?

If someone sells a car they own to a retailer or buying company, they’ll agree on a price and be paid in cash (or more likely a bank transfer). It’s the same story when you trade in a car at the end of a PCP contract, but there’s one extra step, as you don't own the car.

You’ll need to let the company buying the car know how much your optional final payment is and they’ll value the car. As long as their valuation is more than the optional final payment, then it’s a simple matter of them buying the car from the finance company and then you'll be able to take advantage of the surplus.

Instead of handing over the money to you, the company will settle the finance on your behalf by making the optional final payment to the lender.

Any surplus is then put towards a new car - where it can go towards the deposit on a new finance agreement, reducing the monthly payments - or you can choose for it to be paid directly into your bank account.

What happens if your car is worth less than the optional final payment?

In this case, trading your car in is a bad move. If no one will buy your car for the value of the optional final payment or more, then you would have to pay the difference between what you could sell the car for and the remaining finance balance, to ensure that the lender is paid enough to settle the contract.

Instead of doing this, you're better off by simply returning the car to the lender as you'll have nothing further to pay, provided the car's within the pre-agreed mileage limit and in good condition. The low value of the vehicle is then their problem.

Thinking about taking out PCP finance or a lease for your next car? In the excitement of getting a new car, some of the small print and finer details can be forgotten. Or you might feel that the end of the contract you’re signing up for is so far away, so it’s something for future you to think about. But one aspect that you need to bear in mind is “fair wear and tear” and the condition that the car is in when you return it, as it could cost you a lot of money. BuyaCar has you covered on everything car finance related, so keep reading to get your head around the ins and outs of fair wear and tear.

When purchasing a car on finance, you agree to keep the vehicle in good condition throughout the term of the contract - because with PCH leasing the car is never yours and with PCP you don't own it unless you make the optional final payment to buy it. Since the finance company owns the car, therefore, if you return the car covered in dents and scrapes, you can expect to be handed a hefty bill to fix the damage. Car finance companies expect the car to come back in a condition in line with its age and mileage and will accept any damage deemed to be fair wear and tear.

Fair wear and tear covers what the lender considers to be an acceptable level of wear. If the car is considered to be worn beyond that accepted level, you can expect a bill for the cost of rectifying any excessive wear. What's acceptable varies with the age and mileage of the vehicle, but the finance company is looking to ensure the car is in a suitable condition to be sold on.

If your car is stolen or written off, your insurance company will pay out the current value of the car. But in many cases you’ll owe more than the car is worth, so you’ll need to pay the finance company to settle the outstanding debt - even if you don’t have a car to show for it. Selecting to add gap insurance when you take out your PCP contract gets rid of this; check out our guide to gap insurance for more information.

What is fair wear and tear?

Finance companies understand that a car that has been used for several years and has a few thousand miles on the clock won’t be in exactly the same condition as when it left the factory. Instead, they accept that in daily use a vehicle will suffer what they call ‘fair wear and tear’.

Generally speaking, this means a few light scratches and stone chips on the body, windows, and plastic wheel trims, and even a couple of minor dents here and there. However, it does not include damage such as serious dents, a cracked headlight, poor paint repairs, cracked trim and torn seats. To get an idea of what you might be charged for, stand a few paces back from the car and see what imperfections you can see.

Read on for a detailed explanation of what does and does not constitute fair wear and tear below.

Why does fair wear and tear matter?

When you sign a PCP contract, your monthly payments are affected by what the finance company predicts the vehicle will be worth at the end of the agreement. That means that if you sign up for a high-mileage contract, the difference between the car's price new and its expected value at the end of the contract is greater, a high-mileage car will be worth less when the contract ends - increasing your monthly payments.

Similarly, if you return the car with large dents on every panel, scraped alloy wheels and torn seat fabric, the car will be worth less than expected - and the finance company will expect compensation for this. Finance quotes are based on the assumption the car will be returned in good condition with only minor - or fair - wear and tear, but if it isn’t, you will be charged for the cost of returning that car to that condition.

Should I be worried?

As long as you are aware of the expectations of your finance company, and you are careful with the car, there really is no need to get concerned about wear and tear. 

It's important to remember that you are not the owner of the car with a lease, or with PCP unless you've completed all the monthly payments and choose to make the optional final payment, so we suggest driving the car in the same way you would drive your dad's car: carefully.

Of course, turning a blind eye to casual scrapes or even more serious damage will not end well, and we recommend you strive to take as much care of the car as you can to be on the safe side. Basically, treat it as if it is your own. But simply using the car for your day-to-day activities, with it picking up the occasional small stone chip or car park door ding should not lead to additional charges.

How and when are charges applied?

Damage charges are issued at the end of the contract if you decide to return the car to the finance company, as you do with a lease or PCP finance, where you choose not to buy the car outright.

At this point, you arrange to have the car inspected by the finance company that will record anything considered more substantial than fair wear and tear. Within four weeks you'll be notified what (if any) rectification work is required and how much you will be charged.

However, you can also face rectification charges indirectly when you part-exchange the vehicle. In this situation, the dealer offers to settle the outstanding balance with the finance company to clear the remaining debt and purchase the car outright.

If, due to its poor condition, the car is worth less than the finance company wants for it, you'll be asked for a top-up payment to cover its refurbishment before accepting it in part-exchange and paying off the finance company.

How can I avoid charges?

The best way to avoid being charged is to take care of your vehicle. If the car is handed back to the finance company in an acceptable condition, you'll be able to walk away without having to pay a penny more.

Where the car has picked up damage - whether these are substantial scrapes on bumpers from clumsy parking or large scuffs on the wheels - you may want to get quotes for putting these right. In this scenario, you can contact the finance company to understand what they'd charge for rectifying certain types of damage and then you can see whether it'll cost you less to address any issues before the car is collected or simply pay any charges from the finance company. 

What is acceptable wear and tear?

Body

✔ Small paint chips providing they aren’t rusting; small dents providing the paint is not broken; light scratches that can be polished out; small scuffs and scratches on unpainted trim and wheel trims.

✘ Rust or evidence of poor paint and body repairs; large dents and deep scratches; marks left by stickers; broken unpainted trims.

Where fitted, a towing bracket should have been approved by the finance or leasing company and be in good condition with a tow ball cover in place. Convertible hoods should be free of damage. Vehicle underside and catalytic converters should be free of damage.

Windows and glass

✔ Chips as long as they have been professionally repaired, light scratching outside the driver’s field of view; replacement windscreen and headlights as long as, where fitted, the car’s 'ADAS' system - cameras and sensors that may be mounted behind the system and form part of the car's crash avoidance safety kit - has been recalibrated.

✘ Scratches and chips within the driver’s line of vision; damaged or cracked mirror and lights lenses; broken heated and adjustable mirrors; non-functioning heated screen.

Wheels and tyres

✔ Tyres that are to car maker’s specification with tread depth that meets legal requirements; light scratching and scuffing of wheel trims.

✘ Corroded or damaged alloy wheels; dented wheel trims or wheel rims; used tyre inflation canister; incomplete or missing spare wheel and tools (where fitted to begin with).

Mechanical condition

✔ Car in a safe, legal and reliable condition that could pass an MOT test.

✘ Warning lights showing; grooved brake discs; faulty engine and gearbox.

Interior

✔ Light scratches and marks on treads, sills and seals.

✘ Holes, burns and tears on seats, trim and carpets; missing parcel shelf load cover, adjustable boot floor; nets and restraining straps; faulty media systems and missing SD cards.