What happens at the end of a car lease?
Whether you know how leasing works, or if it’s all new to you, it’s important that you know what your options are at the end of the lease you’re choosing.
So, we’ve written a guide to break down the different leasing contracts available, what happens at the end of each, and finally we’ll conclude with some tips to consider before returning your car at the end of the lease contract.
Car leasing overview
Car leasing, generally speaking, is a way to finance a car that you couldn’t ordinarily afford to pay for outright, or that you simply don’t want to pay huge amounts upfront for.
It allows people from all different financial backgrounds to pay monthly for a brand-new or nearly-new car over a set period of time, with different options at the end of the car lease.
The three main types of lease
- Personal contract hire (PCH)
- Personal contract purchase (PCP)
- Hire purchase (HP)
How does personal contract hire work?
Personal contract hire, or PCH, is often the most common way of car leasing. Simply choose the car you want, pay a deposit (if any), agree on a timeframe, monthly fee and annual mileage allowance, and drive the car away.
You’ll then pay the agreed monthly payments to lease that car for the stated term – usually between 24 and 48 months.
With a PCH, you’ll never be the legal owner of the vehicle. It’s effectively a long-term rental.
The main reason personal contract hire is so popular is that the monthly payments are usually lower than other types of leasing – as you’re only covering the cost of the vehicle’s depreciation while you drive it, rather than the whole thing.
And there’s no worry about paying a balloon payment at the end because with a PCH, that’s not an option.
What happens at the end of a personal contract hire agreement?
At the end of a personal contract hire agreement, you simply hand the car back and walk away.
And as long as you haven’t exceeded your agreed mileage or damaged the vehicle outside of the fair wear and tear guidelines, then there’s nothing extra to pay.
After that, you’re free to find a new deal.
Read our guide on personal contract hire here.
How does hire purchase work?
Hire Purchase, or HP, is where you split the entire cost of the vehicle evenly over a set period of time into monthly payments.
There are no mileage restrictions – as you’re not just covering the vehicle’s depreciation – and it’s seen as the easiest and most cost-effective way of buying a car outright without having to make a big upfront payment.
The monthly payments aren’t just dependent on the price of the vehicle, however. If you make a deposit, your payments will be lower, and if you have good credit they’ll be lower than if you had bad credit.
What happens at the end of a hire purchase agreement?
At the end of a hire purchase agreement – after you’ve paid your final payment – you become the legal owner of the vehicle. It’s then yours to do with as you wish.
You can keep the vehicle to enjoy driving without having to make monthly payments, part exchange it for another and use it as a deposit, or sell it privately for cash.
Read our guide to hire purchase here.
How does personal contract purchase work?
Personal contract purchase, or PCP, gives you flexibility and often provides the best of both worlds from PCH and HP.
Like a personal contract hire agreement, at the start of a PCP, you pick the car and set an annual mileage limit.
That’s because, with a personal contract purchase – like and PCH – your monthly payments are covering the vehicle’s depreciation while you’re the registered keeper.
However, the amount of miles you choose at the start also determines what your guaranteed minimum future value (GMFV or balloon payment) will be at the end of the agreement if you choose to keep it.
What’s a guaranteed minimum future value?
A guaranteed minimum future value, also known as a GMFV, balloon payment or residual value, is how much your vehicle is expected to be worth at the end of your PCP agreement.
It’s calculated by taking into account industry information – such as if there’s a new model being released soon or how well that specific vehicle holds its value, as well as how many miles a year you’re going to do.
The more miles you’re going to do, the less the vehicle will be worth at the end, so the lower the residual value.
During a PCP agreement, which is usually 24 to 48 months, you pay the difference between what the car was worth at the start of the agreement and what it’s predicted to be worth at the end through your fixed monthly repayments.
So, if the vehicle you choose is worth £15,000 when you start your PCP term, and the residual value is £7,000, your monthly payments will cover the £8,000 gap, plus interest.
What happens at the end of a PCP agreement?
At the end of a PCP agreement, you have three options.
Return the car
You can choose to hand the car back and walk away as you would do on a personal contract hire agreement.
The same rules apply for a PCP, whereby if you choose this option, you must have kept below your agreed mileage and the car mustn’t be damaged outside of fair wear and tear otherwise you’ll face extra charges.
Buy the car
If you want to keep the car, you can choose to pay the balloon payment – which is the same as the GMFV or residual value.
Once you’ve paid that, the car is then yours to do with as you wish.
Once your agreement ends, you can part exchange the vehicle and upgrade to another.
At that point, the vehicle will be valued, and if it’s worth more than the residual value (GMFV or balloon payment), then you can use that extra cash as a deposit on a new model.
What to do before you return a car on lease
If you’re on a personal contract hire agreement or if you’ve decided to return the car on your personal contract purchase, there are some things you should do before you hand it back.
Check your mileage
Before you hand your vehicle back, it’s important to check the mileage. That way you can see if you’ve kept to your mileage restrictions if you haven’t been keeping track of it.
If you’ve gone over, you just need to be aware that you’ll face a pence-per-mile charge. That would have been agreed at the start of the agreement and will be on your paperwork.
Clean your car inside and out
Before saying goodbye to your vehicle, you should give it a clean inside and out. This isn’t contractual, but it ensures you don’t leave anything inside and you can take a look around the vehicle.
If there’s any damage that isn’t deemed fair wear and tear, it might be better to get it repaired before handing the vehicle back. That way you can avoid any hefty charges from the finance company.
Restore to original condition
If you’ve made any modifications to the vehicle, either styling or performance-based, you’ll need to remove them before handing the car back – even if they add value.
You must return your car in the same state you took it, minus any fair wear and tear, and if you don’t remove any extras, you’ll be charged for the labour.
Make sure you have the keys and documents
It may sound simple, but it’s something that catches people out. If your vehicle originally came with two keys, you’ll need to hand two keys back – otherwise, you’ll be charged for the replacement.
Also, any additional bits that came with the vehicle, such as locking wheel nut and all manuals will have to be returned with the vehicle.
Can I extend my car lease?
If you wish to extend your car lease past the original end date, you need to speak to your finance company.
On a personal contract hire, if your lender allows you to extend your contract, you may be charged for the privilege.
However, if you have a PCP agreement, one way to extend your agreement is by paying the final balloon payment and keeping the vehicle.
If you want or need to extend your lease agreement, it’s best to read your contract or contact your lender.
Where do I need to take my vehicle for collection when my lease ends?
Usually, at the end of your lease agreement, your finance company will arrange for your vehicle to be collected from your home or the address they have on record.
However, if that’s not the case, they’ll always specify where you must take the vehicle before it’s time to hand it back.
Can I end my lease early?
You can end your car lease agreement at any time. However, depending on how far you’re into your agreement and how much you have left to pay, the financial penalties could be large.
A personal contract hire agreement is meant to last for the entire time proposed. If you need to end it early, you’ll likely face early repayment charges and may have to repay the remaining balance on the contract in full.
If you have a PCP or HP agreement, one way to end your contract early is by part exchanging the vehicle.
With a PCP or HP agreement, you can part exchange your vehicle for another at any time; however, there may be an imbalance in how much your vehicle is worth and how much you still owe.
If the outstanding finance is higher than your vehicle’s worth, you’ll have to cover the shortfall, either by adding the remaining balance to a new agreement or making a large payment.
What is the BVRLA’S fair wear & tear guide?
If you choose to hand your vehicle back to the finance company or if you’ve taken out a PCH agreement, your vehicle will be assessed against fair wear and tear guidelines before it’s taken away.
Your lender won’t be expecting the vehicle back in pristine showroom condition, but you also can’t hand it back with damage that’s outside what would be expected on a vehicle of its age without penalty.
The BVRLA is the British Vehicle Rental and Leasing Association. Their fair wear and tear guide sets the standard across the industry and is in place to not only protect the finance companies but to protect you, the consumer, as well.
Before you hand the car back, you should request a BVRLA fair wear and tear guide from your finance company. But to give you an idea, there are some steps to take below.
As we’ve already discussed, ensure there’s no major damage, dents or scratches to the vehicle before you hand it back.
If there is, it might be an idea to talk to a bodywork specialist and get it priced up before the end of your contract. It may be cheaper to repair yourself, but be aware that in many contracts this isn’t allowed.
Also, be mindful of rust and corrosion. If you spot any, you should look at getting this removed and restored professionally.
Check everything works
Ensure that everything is in working order, including electrical and safety features. If you notice something isn’t as it should be, see if you can get it fixed before handing it back.
Also, if there are any warning lights on the vehicle, you should get these checked before you hand it back.
What do I do after I’ve returned my lease car?
After you’ve returned your lease car, you’re then free to enter another agreement if you wish.
It doesn’t have to be with the same company as your last one or the same type of vehicle, you have complete control over where you get your next car from.
If you’re currently looking for a new vehicle or will be ending your lease agreement soon, you can use our search tool and find the perfect vehicle for you in minutes. Just click here to begin.
Alternatively, if you’d rather secure your finance first, you can do so without affecting your credit score by using our quick and easy Apply Now feature.