What is a PCP balloon payment and do you have to pay it?
Written by
Joe Towner
Reviewed by
Amy LancashireA PCP balloon payment is the lump sum you pay at the end of a Personal Contract Purchase (PCP) agreement if you want to own the car. It's also called the optional final payment. Your lender sets it at the start, based on what it expects the car to be worth when the agreement ends. You don't have to pay it. You can hand the car back or part-exchange it instead.
What does the balloon payment mean on PCP?
On a PCP, your deposit and monthly payments cover the gap between the car's price and its predicted value at the end, plus interest. That predicted value is held back as the balloon, which keeps monthly payments lower. For a refresher, see how PCP works.
You'll often see two terms:
Optional final payment: the amount you pay at the end to own the car
Guaranteed Minimum Future Value (GMFV): the lender's prediction of what the car will be worth at the end, which the balloon is based on. Some lenders call it the Guaranteed Future Value (GFV)
The balloon mainly depends on the car, the length of your agreement and your annual mileage limit. Your finance agreement shows the exact amount, plus any option-to-purchase fee.
Do I have to pay the balloon payment?
No. You have 3 main options. Tell your lender which you've chosen before the final payment date, as it may collect the balloon automatically if you don't.
Pay it and keep the car
Pay the balloon, plus any option-to-purchase fee, and the car is yours. This can make sense if you want to keep the car, or if it's worth more than the balloon.
Hand the car back
Return the car and you won't pay the balloon. If you've gone over your mileage limit or there's damage beyond fair wear and tear, you could pay extra charges.
This is where the 'guaranteed' part of the GMFV comes in. If the car is worth less than the balloon, known as negative equity, handing it back means the lender takes that loss, as long as you've kept to the terms of your agreement.
Part-exchange or sell the car
If the car is worth more than what you still owe, the difference is called equity. A dealer can pay off your finance and put the equity towards your next car. You can also sell it yourself, but the finance has to be cleared first. Read more about selling a car that's still on finance.
If the car is worth less than you owe, you'll need to cover the difference.
Can I refinance my PCP balloon payment?
It's often possible. Refinancing means taking out new borrowing to pay the balloon, so you keep the car and spread the cost over monthly payments. The main routes are:
Your current lender: some lenders offer to refinance the balloon at the end of the agreement
A new lender: a new hire purchase agreement or a personal loan to pay off what you owe. Here's how personal loans compare to car finance
A new PCP on the same car: this keeps monthly payments lower, but you'll have another balloon at the end
You'll pay interest on the new borrowing, so the car costs more overall, and any lender will check you can afford it, usually including a credit check. Read our page on refinancing car finance.
What if I can't afford the balloon payment?
Talk to your lender as early as you can, before the final payment is due. You can still hand the car back, part-exchange it or look at refinancing.
You also have a legal right to end the agreement early and return the car, called voluntary termination. Under section 99 of the Consumer Credit Act 1974, you can use it at any time before the final payment is due. If you've paid less than half of the total amount payable, which includes the balloon, you'll need to pay the difference up to half, unless your agreement asks for less. You may also have to pay more if you haven't taken reasonable care of the car. Both rules are set out in section 100.
If you’re struggling generally to pay off debts or bills, you can find free debt advice through MoneyHelper.
PCP balloon payment FAQs
Do I pay interest on the balloon payment?
Yes. Interest is charged on the full amount you borrow, including the part held back as the balloon.
Does a PCP settlement figure include the balloon payment?
Yes. A settlement figure is the amount needed to clear your agreement in full on a given day. On a PCP, it includes the balloon, which is why it can be much higher than the monthly payments you have left.
Can I negotiate my balloon payment?
The balloon is fixed when you sign your agreement, and your lender doesn't have to change it. Comparing it with what the car is worth now shows whether you have equity, which helps you weigh up paying, handing back or part-exchanging.
Do other types of car finance have a balloon payment?
Hire purchase usually doesn't. You pay off the full amount through your monthly payments, which is the main difference between PCP and HP. Some hire purchase and conditional sale agreements do include a balloon, but on those the final payment isn't optional. Leasing has no balloon, because you hand the car back at the end and never own it.
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
