Optional final payment

Definition

An optional final payment is something in a car finance or leasing agreement that allows the customer to pay a one-off fee to own the vehicle at the end of the agreement. It is most commonly found in personal contract purchase type of product.

When will I have an optional final payment?

An optional final payment is most often found in car finance and car leasing products where you don’t actually own the vehicle during the term of the agreement. Instead you effectively hire the vehicle across the finance period.

One you reach the end of the agreement, you often have an option to pay a one-off final fee to own the vehicle. This optional final payment, sometimes referred to as a balloon payment, allows you to pay off any outstanding value on the car and take ownership.

How is the cost of the optional final payment set?

In most leasing agreements, the amount you pay across the agreement is based on the loss of value, or depreciation, that the car suffers from the start until the end of the contract. This depreciation can be somewhat predicted, so the car finance provider will examine the marketplace and how the prices of other cars have fallen across the years to predict how much the car will be worth at the end of the agreement. This is what’s referred to as the guaranteed future value.

It’s this guaranteed future value that will be used to set the price of the optional final payment.

Can the optional final payment be changed?

The car finance provider will want to ensure that the value of the car is preserved, so that the guaranteed future value they set is not higher than the value of the vehicle itself. To preserve the value, you will need to stick to annual mileage limits and preserve the car’s condition. If you go out of these guidelines, then you will often be charged a few.

This will affect the value of the car at the end of the agreement. However, the optional final payment may not change. It all depends on the terms of the agreement set at the start. The price of the payment may go down if the vehicle has exceeded the milage and condition requirements, but you will have already paid a penalty as a result, so the change in cost may not be that apparent.

Can I finance the optional final payment?

If you want to pay the optional final payment, but don’t have the funds to pay it off in one lump sum, then you may be able to finance the cost. You should speak to the finance provider to see what options they have. You should also shop around and see what other quotes you can get, as you shouldn’t assume using the same provider will result in the best deal.

The good thing about financing the optional final payment is that you will own the car at the end of the agreement, meaning you no longer have to be concerned about mileage and condition limits.