If you are approaching the end of your PCP car finance agreement, you will have a decision to make. Return the car, make the big balloon payment… or a third option - refinance!

Personal Contract Purchase (PCP) is a popular way to finance a car because it offers lower monthly payments than other car finance options. For more information, check out our dedicated page on how PCP car finance works.

Over the course of your PCP agreement, you’ll make the lower monthly payments. But now you are at the end of the agreement - what happens? If you want to keep the car, you’ll need to make a larger final payment - often called a "balloon payment." This is the car’s remaining value. Otherwise, you can return the car without making this payment or trade it in for a new model under a new PCP or HP agreement.

What if you want to keep the car, but the balloon payment is too much money to find at once? This is where the option of refinancing comes in.

Refinancing the Balloon Payment

Why Refinance?

• Spread the Cost: Refinancing gives you the option to avoid paying a large sum all at once. Instead, you can spread the cost of the balloon payment over a new loan term. This makes it easier to manage your finances - because you will be able to explore the possibility of more affordable monthly payments.
• Keep Your Car: Refinancing is an appealing option if you like the car and want to keep it, but don’t have the cash to pay the balloon payment upfront.

Benefits of Refinancing:

• Lower Monthly Payments: When you refinance, the new loan spreads the balloon payment over monthly payments of a new loan term. This can make it easier to manage your money.
• Extended Loan Term: Refinancing usually allows you to opt for a longer repayment period, which can make your monthly payments smaller. This can take away immediate financial stress.
• Improved Credit Score: Consistently making your monthly payments on time can help improve your credit score. By refinancing, you give yourself a stronger chance to keep up with these payments. On-time, full payments contribute positively to your credit history and score.
• Access to Better Interest Rates: If interest rates have dropped since you first signed your PCP agreement, refinancing could allow you to take advantage of these lower rates. This means you could pay less in interest over the loan term.
• Avoid Repossession: If you can’t afford the balloon payment, the lender has the right to repossess the car. Refinancing can help you avoid this sticky situation by helping you meet your financial obligations without losing your vehicle.

How to Refinance the Balloon Payment

Steps to Refinance:

1. Get a Settlement Figure

The settlement figure is the total amount you owe on your current PCP agreement, including any remaining balance and the balloon payment. You’ll need to request this figure from your current lender. This is the first step in the refinancing process because it tells you exactly how much you need to refinance.

2. Apply for Refinancing

You don’t have to refinance with your original lender. We can help you explore around and compare offers, to find a lender that offers the best terms for your financial situation. There are plenty of lenders that specialise in refinancing balloon payments. These lenders may offer better or more flexible terms than your original lender.

Lenders will likely perform a credit check as part of the refinancing process. Many start with a soft credit check, which doesn’t affect your credit score, to give you an idea of the rates and terms you might qualify for. If you decide to proceed, there will be a hard credit check carried out. Remember, hard credit checks can affect your credit score. We have info here about how to navigate credit checks.

3. Start New Agreement:

Once you’re approved for the new loan, you’ll enter into a new finance agreement with the lender. This new agreement will state the terms of repayment, including the interest rate, monthly payments, and loan duration.

After the paperwork is finalised, you can continue to drive your car while making the new payment amounts under the new terms.

Refinancing Options

Hire Purchase (HP):

With a Hire Purchase agreement, the refinancing lender pays off your balloon payment, and you repay the lender in fixed monthly instalments over a set period. Once all payments are made, you own the car.

HP agreements are flexible in terms of repayment duration, usually ranging from 1 to 5 years. This allows you to choose a plan that suits your budget. It’s also a good option for people with lower credit scores, since the loan is secured against the car.

Personal Loan:

A personal loan is an unsecured loan that you can use for any purpose, including paying off a balloon payment. The loan is deposited directly into your bank account, and you can use it to pay the balloon payment. You can then own the car outright.

Personal loans generally offer competitive interest rates, especially if you have a good credit score. However, because the loan is unsecured (not tied to the car), the rates might be higher if your credit score isn’t the best. Check out our nifty tips for boosting your credit score.

Things to Consider

Car Value vs. Balloon Payment:

Evaluate how much your car is worth on the market. Before deciding to refinance, it’s important for you to check the current market value of your car and compare it to the balloon payment amount.

• If your car’s current value is higher than the balloon payment, refinancing could be a good decision because you’ll be paying less than the car is worth.
• If the car is worth less than the balloon payment, it might be better to return the car to your lender. This is because in this situation, you’d essentially be paying more than the car’s current value.

Flexibility

Remember, PCP agreements are designed to be flexible. If you choose not to refinance, you can still return the car without any further payment or use the car’s value as a trade-in for a new vehicle under a new PCP agreement.

Refinancing isn’t your only option! If you’re ready for a change, you could trade in your current car for a newer model. Many lenders offer deals that might include better terms or incentives on a new car if you have made timely, full payments during your PCP finance agreement until now.