If you’re in the market for buying a new motor, you may be wondering what your financing options are. There are several types of car financing options out there which all carry their pros and cons. One of the most popular types of car finance on the market is a Personal Contract Purchase (PCP) agreement.

One upside of a PCP agreement is that it typically has lower monthly repayments, compared to a Hire Purchase (HP) agreement, for the trade-off of a balloon payment at the end of your term. In this guide, we’ll break down what a balloon payment is, how it’s calculated, and what your options are when it’s time to make the payment.

Balloon Payment Meaning

A balloon payment is simply a large lump sum payment required at the end of a PCP agreement. Unlike a HP agreement, where you would pay off the entire cost of the car in fixed monthly instalments, PCP offers lower monthly payments in exchange for this final payment.

Your monthly PCP payments cover the interest and depreciation of the car’s value over the term. This leaves the remaining cost to be settled at the end. Once the balloon payment is made, you officially own the car.

How is a Balloon Payment Calculated?

Your PCP balloon payment is calculated with several factors considered. These include:

  • The car’s purchase value: This is the starting point for determining the total amount you will owe.
  • Your down payment: Any deposit or part exchange value you contributed will reduce the remaining amount to be financed down the line.
  • Guaranteed Minimum Future Value (GMFV): This is the estimated value of what the car will be worth at the end of the agreement. This is determined by the lender based on market trends, as well as depreciation projections for the specific car model, mileage, and age.
  • Interest rate: The interest charged on the loan amount will also impact the final balloon payment.

What Are Your Options When the Balloon Payment Is Due?

At the end of your PCP agreement, your balloon payment will be due, and you will typically have three options:

  1. Pay the balloon payment: This will result in you owning the car outright once you settle the final payment. The ownership title of the vehicle will be transferred to you.
  2. Return the car to the lender: If you no longer need the car or don’t want to keep it, you can simply return it to the lender in good condition (as per the terms of your agreement) with no further obligation.
  3. Refinance the balloon payment: Depending on your lender, you may be able to spread out the balloon payment into a new loan with extended monthly instalments. Please note that this is not always available and may come with additional fees and interest charges.

Find Your New Car with Ucan

Whether you’re ready to begin a PCP agreement or looking for other options to finance your new car, Ucan can assist you along the way. Get started by looking at the complete range of vehicles in our showroom and find your perfect car. You can also get a quick quote online, it’s simple and just takes 30 seconds to get you on the road to a new set of wheels.

Balloon Payment FAQs

Have more questions about balloon payments? Here are some frequently asked questions to help you be more informed.

What happens if my car is worth more than the balloon payment?

If your car’s market value at the end of the PCP term is higher than the GMFV the lender estimated, then you may have some equity in the car. This equity can be used towards a down payment on a new vehicle.

Can you refinance the PCP balloon payment?

This will ultimately come down to the lender’s policies. Some lenders may offer refinancing options, but these will typically come with additional costs. You will also be extending the overall loan term, which may potentially increase the tidal interest paid.

What happens if I can’t pay my balloon payment?

If you’re unable to make the balloon payment, this may result in the lender repossessing the car. This could ultimately impact your credit score and, in turn, make it difficult to secure financing down the line. If you think you’re not going to be able to make the balloon payment, it’s best to contact your lender in advance as they may be able to offer alternative solutions or repayment plans.

Does a PCP settlement figure include the balloon payment?

The settlement figure typically refers to the total amount needed to pay to own the car outright. This may include:

  • The remaining balance on the loan
  • Any outstanding fees
  • The balloon payment

The settlement figure essentially allows you to settle the agreement early and become the owner of the vehicle.

Can I pay balloon payment with a credit card?

It’s typically not recommended to pay the balloon payment with a credit card. Due to the balloon payment often being a significant sum, you may be subject to high-interest rates by using your credit card for the purchase. It’s usually recommended to explore other options to settle the balloon payment, including refinancing, if available with your lender.