In this guide, we break down what excess mileage charges are, how they're calculated, and offer tips on how to avoid them.
One aspect often overlooked when financing a vehicle is the excess mileage charge. Understanding these charges can save you from unexpected costs at the end of your agreement. Whether you have a personal contract purchase (PCP), hire purchase (HP) or personal contract hire (PCH) deal, it’s important to know your mileage limits and what the potential penalties could be if you exceed them.
Excess mileage charges occur when you exceed the agreed-upon mileage in your vehicle finance contract. These limits are most commonly found in PCP and PCH agreements.
Mileage limits: Finance agreements, particularly PCP and PCH, set annual mileage limits that influence the car’s predicted value at the end of the contract. The more miles a vehicle covers, the more it depreciates. Lenders use mileage limits to estimate the car’s future value accurately.
Impact on monthly payments: A lower mileage limit generally results in lower monthly payments, but exceeding that limit can lead to excess mileage charges. These charges compensate the lender for the car's additional depreciation due to the higher mileage.
Not all car finance agreements come with mileage limits and excess mileage charges. Here’s a breakdown of the different types of finance agreements and whether excess mileage charges apply:
Car loans (unsecured personal loans): No, there are no excess mileage charges. Since you own the vehicle outright from the start, there are no restrictions on how many miles you can drive.
Personal contract purchase (PCP): Yes, excess mileage charges apply. Your agreed mileage limit is crucial in calculating the car’s residual value at the end of the agreement.
Hire purchase (HP): No, there are no excess mileage charges. Since you’re working towards owning the vehicle outright, mileage limits typically do not apply.
If you exceed the mileage limit on your PCP or PCH agreement, you’ll face excess mileage charges at the end of the contract. These charges are usually calculated on a per-mile basis, which can vary significantly depending on your lender and agreement.
Financial implications: Exceeding your mileage limit can lead to significant charges. For example, a lender may charge anywhere from 3p to 60p per mile over the agreed limit. This might seem small initially, but it will soon add up if you’re much over your limit.
Impact on vehicle resale value: Higher mileage can reduce the car's resale value, which is why lenders impose these charges. The excess mileage charge compensates for the additional wear and tear that affects the car’s future value.
When are excess mileage charges paid?
Excess mileage charges are typically payable at the end of your finance agreement. Whether you're returning the car to the dealership (in the case of PCP or PCH) or opting to hand it back at the end of the loan term, the charges will be calculated based on how many miles over the limit you've gone.
How excess mileage is calculated: Lenders calculate the charge based on the miles you’ve gone over your limit. For instance, if you exceeded your limit by 5,000 miles and your contract stipulates a charge of 10p per mile, you would owe £500 at the end of the agreement.
Annual mileage limits and carryover miles: Mileage limits are typically set on an annual basis, but some lenders may allow flexibility, meaning you can carry over unused miles to the next year. Check your contract for these terms.
Can I change my mileage limit allowance?
If you realise mid-contract that you're likely to exceed your mileage limit, some lenders offer the option to adjust your mileage allowance. This usually results in an increase in your monthly payments, however.
Requesting a mileage extension: Contact your lender to discuss adjusting your mileage limit. This is usually easier to arrange earlier in the contract rather than towards the end.
Impact on monthly payments: Increasing your mileage limit mid-contract will almost always lead to higher monthly payments. The lender will recalculate the car’s predicted value based on the increased mileage, affecting the overall cost of the agreement.
Updated paperwork: If a change in mileage allowance is agreed upon, your lender will issue updated paperwork reflecting the new terms. Be sure to review these documents carefully to understand any new costs involved.
To avoid excess mileage charges, planning ahead is really important. Here are some strategies to help:
Estimate your mileage accurately: When entering a finance agreement, be realistic about your annual mileage. Underestimating your mileage to save on monthly payments could cost you more in the long run.
Factor in commutes and additional trips: Remember to include both daily commutes and any regular long-distance trips when estimating your mileage. Consider holidays, work travel, and other commitments that may add miles.
Set a comfortable mileage limit: It’s better to overestimate your mileage than underestimate it. Opting for a higher limit upfront could prevent you from paying hefty charges later.
Consider a finance option without mileage limits: If you're concerned about mileage limits, consider choosing a finance agreement that doesn't impose restrictions, like a personal loan. This way, you’ll have full ownership of the vehicle from the outset, with no penalties for high mileage.
Understanding excess mileage charges is essential for anyone entering into a PCP or PCH car finance agreement. These charges can significantly affect the overall cost of your car finance, especially if you’re someone who drives more than the average annual mileage.
By accurately estimating your mileage, choosing the right finance agreement and reviewing your contract, you can avoid unexpected charges at the end of your loan term and save yourself money. Always talk to your lender if you foresee any issues and explore options to modify your mileage limit if necessary.
