Mis sold car finance
Frequently Asked Questions
You can buy the car at the end of the deal but you don’t have to – in reality you have three options:
1. Buy the car by paying the balloon payment. Pay this then you’ll own the car outright. Do note that most finance companies charge an added fee if you buy the car (this can be up to £500 but is usually lower).
2. Hand the car back and walk away. This means you have nothing more to pay (subject to damage, and over-mileage charges, see below for more info).
3. Get a new car. This is the most common option for people taking a PCP deal. Usually at the end of a PCP deal, the car will be worth slightly more than the balloon payment. And if this is the case, your dealer will usually ask if you want to use that ‘equity’ as a deposit on a new PCP deal on a brand new car. For example, if the car’s actual value at the end of the deal in the example above was £9,000 and the balloon payment is £8,000, you’d have the difference of £1,000 that you could use as a deposit to roll into another deal.
Usually people go for another PCP, but you don’t have to. Sadly, you can’t take the extra as cash – unless you buy the car and then sell privately (or get agreement from the finance company to sell it & then pay off the finance)!
You don’t have to worry about the car being worth less than the balloon payment – that is if it’s lost more value than was expected at the start of the deal. If that happens, the sensible course is just to hand the car back – the finance company takes the hit.
We mentioned that you could face charges if you hand the car back, whether that’s trading it in, or just handing it back and walking away. There are two main types of charges, but both are avoidable:
Over-mileage charges. At the start of a PCP deal, you’ll be asked to specify how far you’ll drive the car each year. This is so the dealer can accurately assess the car’s worth at the end of the deal to set the balloon payment. A car that’s done a 10,000s of miles will be worth a lot less than a car that’s only been used infrequently.
It’s important to be as accurate as you can, as if you go over the agreed mileage limit, the finance company will charge 7p-10p for every mile you are over. Watch out for this, as 1,000 miles over will see you shelling out £100 at the end of the deal.
Damage charges. Just like when you rent a car, the finance company will check it for damage when you hand it back. Normal wear and tear is acceptable, but the car needs to be in a sale-able condition, which means you’ll likely be asked to pay to put right any large scratches or dinks in the bodywork.
You can avoid these charges by agreeing a sensible mileage, and taking good care of the car. If there’s damage, it’s worth going to an approved service centre to see if it’ll cost less to fix than the finance company will charge – it may be worth getting it fixed yourself.
The final way to avoid these charges is to buy the car – though that’s not really MoneySaving!
These deals are big business for dealers. A massive 73% of new cars in 2014 were bought using PCP, making it the most common way for people buying new cars to finance them. More than half a million new cars and 10,000s of used cars are bought this way each year.
The final balloon payment means that customers will probably buy another car on PCP rather than pay a big chunk of cash to own the car. So a customer could be visiting the same dealer for decades swapping one car for another, and lining their pockets with hefty interest payments and premiums to buy the car itself.
You don’t have to visit the same dealer – but many buyers will, particularly if they always buy the same make of car.
The dealer is also guaranteed to get the car back in a condition that it can easily sell on (or it’ll charge big penalties if it doesn’t), so it’s win-win for the dealer. Plus the lower monthly payments mean that more of its customers can afford more of its cars.