Ask the expert: ‘Is it worth me making the balloon payment at the end of my PCP?’

Alex Robbins is contributing editor at Telegraph Cars where, as well as responding to readers’ queries, he also contributes reviews of new and used cars, together with articles on buying and selling. 

His knowledge of the used car market informs his many buying guides relating to the best buys in particular sectors, with an emphasis on value for money.  Every week he will answer your questions on buying and selling, as well as solving your car problems, whether consumer or mechanical.

Do you have a motoring dilemma you’d like our expert to solve?  For consumer and used car advice, or car faults, email and include your subscriber number. This week’s question…

Dear Alex,

My Volkswagen Golf 1.5 Life is now a year and only 5,000 miles old. The personal contract plan (PCP) finishes in three years, at which point I am tempted to keep it and pay the balloon payment. Firstly, is this a good idea? Secondly, if I keep it, I would like to have the mirrors converted to fold in when the car is locked, as others do. My VW dealer referred me to a company which can do it for £800. Do you think it’s worth doing? 

– SR

Dear SR,

Generally speaking, from a purely financial point of view, it does make more sense to pay the balloon payment on a PCP deal and keep a car (or sell it on, or perhaps even part-exchange it) than to simply hand it back. This is because when the finance company priced up your PCP plan, it based the balloon payment on the guaranteed minimum future value – a figure which, as the name suggests, is a worst-case scenario, and is based on you hitting the mileage limit on the contract. 

But, so that it isn’t out of pocket if that worst-case happens, the monthly repayments will have been set to take account of the difference between the worst-case final value and the predicted depreciation. In effect, therefore, you’ve been slightly overpaying, and building up a little bit of equity in the car as a result.

Hand the car back, and you lose this equity. But if you pay the balloon payment, you benefit from it, by paying less to own the car outright than you would for an equivalent used Golf on the open market. You aren’t actually getting any money off – but you’re also not losing the money you’ve effectively already spent.

You’d have paid £555 to have folding mirrors fitted when the car was new and you’d have had radar blind spot assistance thrown in for that price. But a whacked mirror will probably cost you even more to replace, so on that basis, £800 could be viewed as decent value. I doubt it’ll add anything to the price you’ll get for car come resale time, but if it brings you peace of mind, you can’t put a price on that. 

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