How PCP balloon payments work

Who this guide is for

It’s for anyone with a PCP, or thinking about one, who wants to understand the balloon and their options. We don’t say whether PCP is right for you.

To sketch your own numbers, our PCP calculator works alongside this guide.

What you’re paying for

Checked 5 October 2026.

How the balloon is set

At the start, the finance company estimates what the car is likely to be worth at the end of the agreement. It bases this on things like the term and your agreed mileage. That estimate becomes the balloon payment.

Your monthly payments mainly cover the expected drop in the car’s value over the term, plus interest. The balloon is the part of the price you haven’t paid yet.

One point often surprises people. Interest is charged on the whole amount borrowed, including the part deferred into the balloon, even though your monthly payments only repay the drop in value.

An illustrative example

• Cash price: £20,000
• Deposit: £2,000
• Amount borrowed: £18,000
• Balloon payment: £8,000
• Drop in value repaid through monthly payments: £10,000, plus interest on the full £18,000

Illustrative example only, not a quote or a representative example. If a dealer or lender advertises a rate, check its representative APR and representative example: at least 51% of people accepted through that advert get that APR or lower, so you may be offered a higher rate. Read the pre-contract credit information for the total amount payable.

Your options at the end

When the agreement ends, you usually have three choices:

• Pay the balloon and keep the car. You can pay in cash, or the lender may offer to refinance it. Refinancing is a new agreement with its own costs.
• Hand the car back. You don’t pay the balloon. If your payments are up to date, you usually pay nothing more, unless the car is over the mileage allowance or has damage beyond fair wear and tear.
• Part-exchange it. If the car is worth more than the balloon, the difference, called equity, can go towards a new deal, often with the same dealer.

Car values can change, so it’s safer not to count on having equity when you sign.

Mileage and condition charges

When you agree a PCP, you set an annual mileage allowance. MoneyHelper says this is usually around 10,000 miles a year, and a higher allowance means higher payments.

If you hand the car back over the allowance, most agreements charge for each extra mile. Damage beyond fair wear and tear can also be charged. Your agreement sets out the charges, so check them before you sign and before you return the car.

Negative equity

Sometimes a car is worth less than what you still owe. If you want to part-exchange early, that shortfall either needs paying or gets added to a new deal. Adding it to a new deal increases what you owe.

Ending a PCP early: voluntary termination

Most PCPs are set up as regulated hire purchase or conditional sale agreements. Under section 99 of the Consumer Credit Act 1974, you can end that type of agreement at any time before the final payment is due, by giving notice. This is called voluntary termination.

Section 100 sets out what you owe when you do. You need to bring your payments up to half of the total price, meaning the total amount payable under the agreement, unless the agreement sets a lower figure.

You may also owe an amount if you haven’t taken reasonable care of the car. A court can order less if the lender’s loss is lower.

On a PCP, the total amount payable includes the balloon. So many people only reach the halfway point near the end of the agreement. If you haven’t reached it, you can pay the difference to make it up to half.

For example, if the total amount payable were £24,000, half would be £12,000. This is illustrative only. Your agreement shows your own total.

A few things to know:

• The car goes back to the lender, and you don’t get any money back.
• The car needs to be in acceptable condition.
• Voluntary termination doesn’t apply to leases, such as personal contract hire.
• National Debtline has a template letter you can use.

Check your agreement type and your lender’s process before you act. Our HP calculator covers hire purchase, where the same rules apply.

Paying off a PCP early

Under section 94 of the Consumer Credit Act, you can repay a regulated agreement early at any time by giving notice. You may get a rebate on the interest, as the rules allow.

Ask your lender for a settlement figure. MoneyHelper notes that admin fees may apply.

If you’re struggling with payments

If you’re finding it hard to keep up, speak to your lender before you miss a payment. It may be able to extend the term or agree another arrangement. Payment holidays are recorded on your credit file.

Repeated missed payments can lead to arrears, default notices, repossession and court action. But under section 90 of the Consumer Credit Act, once you’ve paid a third or more of the total price, the lender can’t take the car back without a court order if you fall behind.

You can get free, confidential debt advice from MoneyHelper, StepChange, National Debtline or Citizens Advice. Our guide on whether to pay off debt or save covers priority debts.

The car finance compensation scheme: status as of 5 October 2026

The FCA has set up a compensation scheme for some people who took out car, motorbike or van finance, including PCP, between 6 April 2007 and 1 November 2024. It covers cases where customers weren’t told about certain commission arrangements. It isn’t about the balloon payment itself.

The scheme rules were published in March 2026 and took effect on 31 March 2026. After a legal challenge, the Upper Tribunal partially suspended the scheme on 2 July 2026. The case is due to be heard in December 2026 or February 2027.

Until the legal process ends, lenders don’t need to calculate or pay compensation under the scheme. The FCA says that if the scheme is upheld and not appealed, it expects payments to begin in 2027.

You don’t need a claims management company or law firm. You can complain to your lender for free.

Be wary of anyone who contacts you out of the blue and asks for bank details. The FCA’s car finance complaints page has the latest position.

Planning for the costs

The monthly payment isn’t the only cost of running a car. Insurance, tax, servicing, tyres and fuel all add up. Our budget planner can help you see the full picture.

If you plan to keep the car, saving towards the balloon from the start can help. A separate cash buffer for repairs can help too. Our emergency fund guide explains how.

If you’re comparing PCP with a personal loan, our loan repayment calculator shows how loan costs work.

The catch

Key takeaways

• The balloon is the deferred part of the car’s price, not a hidden fee.
• Interest is charged on the whole amount borrowed, including the balloon part.
• At the end, you can usually pay, hand back or part-exchange.
• You can end most PCPs early, but you need to bring your payments up to half the total amount payable.
• If you’ve paid a third or more of the total price, the lender usually needs a court order to take the car back.
• You don’t need a claims firm to complain about car finance commission.

Related reading

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FAQ

Is the final balloon payment optional?

Yes. You only need to pay it if you want to keep the car. If you hand the car back with payments up to date, you don’t pay the balloon, but you may pay charges for extra miles or damage beyond fair wear and tear.

Who loses out if the car is worth less than the GMFV?

It depends on what you choose. If you hand the car back in line with the agreement, you usually don’t pay the difference. Ending early or part-exchanging works differently, so check the voluntary termination rules above.

Can I give my PCP car back before the deal ends?

Possibly. Most PCPs are regulated hire purchase or conditional sale agreements, so voluntary termination applies. You need to have paid half the total amount payable, including the balloon, or pay the difference.

Is early settlement of a PCP possible?

Yes. Under the Consumer Credit Act, you can repay a regulated agreement early at any time. Ask your lender for a settlement figure, which may include a rebate on interest and an admin fee.

Will a PCP deal show up when lenders check my credit?

Yes. A PCP is a credit agreement, so it appears on your credit file, and missed payments and payment holidays can be recorded. Our guide to credit score basics explains more.