PCP Balloon Payment

As one of the most popular choices when it comes to car finance, Personal Contract Purchase (PCP) is a finance package that allows for much more flexibility than most.

The core element that allows for this is the Balloon Payment - something that you may find under different wording - let’s deep dive into what it means.

What is a balloon payment?

As a first point of call, it’s important to know that the balloon payment in a PCP deal won’t always be worded as such - it is often referred to as one of the following:

• GMFV (Guaranteed Minimum Future Value)
• Optional Final Payment

Whichever wording is used, these will both be referring to the balloon payment.

At the end of a PCP agreement, when all the monthly payments have been made, the balloon payment comes into play, and is an optional payment that can be made to take full ownership of the car.

The balloon payment holds a large amount of the car’s value when you finance a vehicle on PCP - this results in cheaper monthly payments, as they’ll only be in relation to part of the car’s cost.

How does a balloon payment work?

When taking out PCP finance on a car, you will agree to an initial deposit, annual mileage, and a term (in months).

From there you’ll pay monthly payments, which effectively cover the cost of the vehicle’s depreciation during the agreement.

Once these payments have all been made, it is then up to you whether you want to pay the final balloon payment that is holding the rest of the car’s value.

If you choose to pay it, then you’ll take ownership of the car - if you decide not to, then you can do one of the following:

• Hand the car straight back
• Use any equity in it to use the car as a part exchange

How is a balloon payment calculated?

As the balloon payment is based on the car’s Guaranteed Minimum Future Value (GMFV), this value is based on a few factors at the time the agreement starts, including:

• Make and model of the car
• Estimated mileage during the agreement
• Term of the agreement

Once set, the balloon payment will not change, and will always be the amount to be paid to take ownership of the vehicle come the end of the contract.

Do I have to pay the balloon payment?

The balloon payment is fully optional, and you only need to pay it if you wish to own the car.

Sometimes the balloon payment can be financed to make it easier to pay, but you’ll need to speak with your dealer or finance lender to see if this is possible.

If you don’t pay the balloon payment, and you plan to hand the car back, keep in mind that you could be susceptible to charges for excess mileage or excess wear and tear.

Does every car finance type have a balloon payment?

Not all car finance types have a balloon payment, and effectively, it’s only PCP packages that will have one.

Hire Purchase (HP) agreements have a small fee at the end that sees you take full ownership of the car, but isn’t comparable to a balloon payment.

Meanwhile, a Personal Contract Hire (PCH) deal isn’t built for someone to take ownership of the car, and so requires no final payment.

Pros & Cons to the balloon payment

Pros:

• Helps PCP deals be more affordable compared to the likes of an HP agreement, as a lot of the car’s value is tied up in the balloon payment
• Allows for flexibility come the end of the agreement
• If your car is worth more than the balloon payment at the end of the contract, you can use that equity to part exchange for a new car

Cons:

• The balloon payment is usually in the £1,000s and can be hard to have the affordability to pay it off in one go, though it can be possible to finance it
• The balloon payment could be seen as a big barrier to taking ownership of the car