Choosing car finance to fund the purchase of your next vehicle can help you get a better motor for your money. Spreading the cost across manageable monthly payments means you can often get a more valuable car than one you would need to buy with a lump sum. It’s no wonder car finance has become such a popular option for car buying.

But what happens at the end of a finance agreement? If you are new to car finance, it might seem a little confusing when you look at the different products available and how they work. But it need not be that way. Here’s our quick guide to what happens at the end of your finance agreement.

What type of car finance product?

What happens at the end of your car finance agreement depends on the type of product you have taken out. The two main products associated with car finance are hire purchase, lease purchase, and personal contract purchase. Here are how they both work.

The end of a hire purchase agreement

In a hire purchase agreement, the cost of the car and the interest is spread across the entire length of the finance period. So when you reach the end of the agreement, you will have paid off the entire cost of the car and will own the vehicle. Provided you have paid off the total balance during the length of the agreement, you will be fine to carry on as normal with your car.

Lease purchase

Unlike a hire purchase product, a lease purchase agreement is effectively hiring the car for the length of the finance period. So you will not be paying off the total cost of the car, but just the difference in value between of the vehicle between the start and the end of the finance period.

When you reach the end of the agreement, you will have two options. You can pay off the outstanding cost of the car and take ownership. Or you can return the car to the provider. You will need to ensure you have satisfied any mileage or condition requirements when you return the vehicle. If you have exceeded them, you will be charged an amount that was set out in the terms and conditions at the start of the deal.

Personal contract purchase

A personal contract purchase agreement works similar to a lease purchase, but you have three options at the end of the agreement.

The first is to return the car to the finance provider. Again, you will need to ensure that you have satisfied any mileage or condition requirements set out in the agreement.

The second option is to pay a one-off final payment, called a balloon payment, to take ownership of the car. This will have been set out at the start of the agreement, based on the rate of depreciation in the car’s value assessed at the beginning.

The third option is to use the car as a part exchange on a new finance agreement. That means you can swap your car for a newer make or model, and reduce the monthly payments as a result. If you know you want to change your car regularly, this is an ideal option.

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