PCP finance: what is an optional final payment?

Considering a PCP finance deal, but confused by what the optional final payment is and whether you have to pay it? Keep reading for more

Christofer Lloyd
Apr 23, 2020

Go for a PCP finance deal and you're likely to see the term 'optional final payment' on the paperwork. Or perhaps 'guaranteed future value' or 'balloon payment'. These terms might sound baffling, but they mean the same thing. This amount is what the car is predicted to be worth at the end of the finance contract.

So, why is it important? Well, since monthly payments on a PCP finance deal cover the difference between the car's value at the start of the contract and its expected value when the contract ends - represented by the optional final payment - the size of the optional final payment fundamentally shapes how much you pay every month. It also determines what you'd have to pay when the contract ends if you wanted to own the car.

Unlike traditional car loans or Hire Purchase schemes - where you put down a deposit and then pay the whole cost of a car, plus interest, over a series of monthly instalments, with PCP finance, you don't own the car one you've finished all the monthly payments - they only cover part of the cost of the car. Your monthly bills cover the difference between the car’s initial cash price and its predicted value at the end of the contract. The higher the optional final payment is, the lower your monthly payments. Similarly, the lower the optional final payment, the more you have to pay every month.

              

A car that is desirable second-hand may have an optional final payment of around 50% of its original price on a three-year contract, while one that loses value quickly may have an equivalent figure of just 30%. So, a high optional final payment is good news if you plan to run the car for the length of the contract and then hand the keys back, as you’ll pay less.

Remember, though, that if you want to buy the car at the end of the contract, you’ll need to be able to find enough money to pay this, or refinance. So, while a car that retains much of its value is more affordable in monthly payment terms, it’s more expensive to buy at the end of the contract, as you’ll need to make the optional final payment then - or refinance this - to take ownership.

Meanwhile, a car that loses value quickly is likely to have a low optional final payment. This means that your monthly payments are comparatively high, as they cover a high proportion of the car's initial cash price, however as a result, you don't need to pay such a large optional final payment to buy it at the end of the contract.

What happens if my car's worth less than the optional final payment?

The optional final payment is also sometimes known as the guaranteed minimum future value (GFMV). This term is used as, even if the value of your car were to drop more sharply than expected and the car was worth less than the optional final payment at the end of the contract, you wouldn’t have to pay extra. The car company takes the hit. 

Should this scenario occur, drivers who want to hand the car back are protected from the unexpected loss of value. You simply hand the car back at the end of the contract and provided it's in good condition and below the pre-agreed mileage limit, there's nothing left to pay. This means that the car you hand back may be worth less than the optional final payment. Despite that, it's the finance company that takes the risk, not you.

Meanwhile, those who intended to buy the car at the end of the contract, could either still make the optional final payment to take ownership - though the car at that stage may be worth less than that amount - or hand it back and buy an equivalent car, for a lower price.

On the other hand, if your car is worth more than the optional final payment at the end of the finance contract, this is known as having equity. To take advantage of the additional value in the car over the outstanding balance you can trade the car in for another one, putting the equity towards the deposit on your new car, consequently cutting the monthly payments for this.

Factors affecting the optional final payment

Since the optional final payment reflects how much the car is worth, you can expect to see a lower optional final payment if you take a four-year contract than if you signed up for a two-year contract on the same car, as older cars are worth less than newer ones.

Similarly, signing up for a 20,000-mile-per-year contract rather than a 10,000-mile-per-year one will lead to a lower optional final payment - as the higher the mileage, the less a car is typically worth.

That lower optional final payment means you can expect to pay more per month for a high-mileage contract than a lower one, as the car you hand back will have lost more value.

              

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