Balloon payments and Personal Contract Purchase
27 April 2023
By Joy Pearson
Buying a car can be a significant investment, and many people turn to financing options to make their purchase more manageable. One of the most popular car finance options on the market is Personal Contract Purchase, where you don't pay for the entire cost of the car during the finance agreement and the flexibility you have at the end of the agreement, where you get given 3 options.
Your first option would be to finish the finance agreement and return the car to the dealer. Or your second option would be to pay a balloon payment and you then get to own the car. Then finally, your last option would be to part-exchange the vehicle you've been financing and use it towards a new vehicle. For those who are unfamiliar with this type of financing option, in today's post we will explain what a balloon payment it and how it helps people get the car of their dreams.
Before we go into too much detail, first we need to explain what a balloon payment actually is. A balloon payment is a lump sum payment made at the end of a finance agreement. This agreement works by paying smaller monthly payments for a set period, with a larger final payment due at the end. This final payment is typically much larger than the monthly payments, and it's what makes this financing option appealing to some buyers. Balloon payments allow you to keep your monthly payments low, making it easier to budget for a car purchase.
However, there are some drawbacks to balloon payments. For one, you'll end up paying more in interest since you're spreading out the cost of the car over a more extended period. You'll need to have the funds available to pay off the final lump sum payment at the end of the agreement. If you can't pay this amount, you'll need to refinance the car or sell it to over the balance.
PCP finance is a popular financing option for car buyers. With PCP finance, you pay a deposit and then make monthly payments over a set period, typically two to four years. At the end of the agreement, you have the option to either pay the balloon payment to own the car, return the car or trade it in for a new one. PCP offers some great benefits that other options don't provide. The first one being you have the option to return the car at the end of the agreement, which can be helpful if you no longer need the car or if you want to upgrade to a new one. Another benefit of PCP finance is that it often includes maintenance and servicing in the monthly payments, which can help you budget for these expenses.
On the other hand, PCP finance also has its drawbacks. The monthly payments are typically higher than other finance options, making it more challenging to budget for your car purchase. If you decide to return the car at the end of the agreement, you'll need to ensure that it's in good condition and hasn't exceeded the agreed mileage limit.
To finish, if you're looking for lower monthly payment and have the funds available to make a lump sum payment at the end of the agreement, then the PCP finance option might not be the better choice. However, if you want the option to return the car at the end of the agreement or want to include maintenance and servicing in your monthly payments, then PCP finance may be better suited to your needs. It's essential to do your research and compare different financing options available to you before making a decision. Consider your budget, how long you plan to keep the car, and whether you want the option to return the car or not.