Annual Mileage: Car Finance Jargon Busters
In car finance, you’re going to encounter terms like APR, Hire Purchase, Personal Contract Purchase, and Annual Mileage, among other bits of jargon. In this post, we’re going to focus on annual mileage and why it’s important to understand what it means. Basically, annual mileage is the number of miles you’re allowed to drive each year without incurring extra costs. Your mileage limit depends mainly on the type of car finance product you’ve chosen. It’s crucial to know your annual mileage, so you can stick to the agreed limit and avoid paying penalty charges.
Why Annual Mileage Matters
With car financing, the annual mileage stated in the car finance agreement is a crucial factor when it comes to determining how much you need to pay for the monthly repayments. The lender will be able to calculate the car’s rate of depreciation throughout the length of your car finance contract with them.
Here’s an example of how it works with a personal contract purchase agreement and car leasing. With these two car finance products, you aren’t paying every month to own the vehicle. Instead, the payments you make every month cover the depreciation of the car plus the interest of getting car finance. Higher mileage means greater depreciation and consequently, you’d have to pay a higher amount every month.
Know Your Annual Mileage Limit
Apart from how much you’ll pay, the interest rate, and contract length, it’s also important to know your usual annual mileage before you agree a limit and then sign the car finance agreement. Carefully consider it and assess if it’s sufficient for your driving needs because if you exceed the limit, you will have to pay for the excess mileage done.
How to Calculate Your Annual Mileage
Before getting a PCP agreement or car lease/hire contract, it’s best if you already have an estimate of your average mileage annually. This way, you will be able to set a good number of miles and not go over the agreed limit and pay extra.
To know your annual mileage, know your mileage before the week starts and then record it again when the week ends. This is your average weekly mileage. Now, in getting the annual mileage, you only have to multiply the average weekly mileage by 52 weeks. Be sure to add extra miles for your road trips, emergencies, and others.
You may also check your previous MOT certificates, so you can compare your mileage from year to year. Once you have the average annual mileage, you’ll be able to set a realistic PCP car finance mileage allowance when getting a PCP agreement or car lease contract.
What to Do if I Exceed the Annual Mileage?
The estimated annual mileage may differ from the actual number of miles you’ll actually drive in the future. In the event that your life situation changes, and you find yourself driving further for work, for example, then the first thing to do is get in touch with your car finance company.
You may ask them to increase your PCP or HP car finance mileage allowance and make adjustments to the contract details. Of course, expect to pay a higher amount for the monthly payments. However, this is better than paying for the additional miles exceeded at the end of your contract.
What’s the Charge for Excess Mileage?
In the case that you still exceed your mileage limit, the car finance company will charge you a certain amount per excess mile. The charge may cost from 3p per mile up to over 70p per mile if the car you’re driving is a luxury vehicle or sports car. Such cost may seem small, but this could add up very fast.
Excess mileage charges also usually have a lower rate for the first few thousand miles. However, if you exceed the first extra 5,000 miles, for example, then the rate for the other exceeded miles would be higher. If you go over the agreed mileage limit by 10,000 miles, then that could be an expensive bill at the end of your contract.
Another thing to note is that the charges for the excess miles also have a 20% VAT added. So, if you know the cost per extra mile, factor in the tax you also have to pay. In the event that you won’t need a high annual mileage limit because you’re working from home more often, you may also get in touch with the car finance company and try to request if they can reduce your mileage allowance. If they agree, then you will be able to save money because of lower monthly payments.
Can I Return the Car to Avoid Excess Mileage?
There is a process called Voluntary Termination where you can return the car if you’ve paid a minimum of half the total amount due. This includes half of the total amount plus interest and other charges. If you take this route, then you can avoid paying excess mileage charges.
If there are any sudden changes in your financial situation and you find yourself having a hard time making monthly payments for the car, you may call the car finance company regarding the voluntary termination process.
In most cases, you only have to return the vehicle and not pay anything else. However, if the car finance company finds that the car has incurred damage beyond the typical wear and tear, then they may demand payment from you.
Also, take note that voluntary termination is only applicable to Hire Purchase and PCP agreements. You cannot opt for this route if you’ve taken a PCH leasing agreement. If you really want to return a leased car, expect to pay early cancellation fees and other charges.
Know your average annual mileage before agreeing to any car finance contract. Doing so will help you avoid paying excess mileage charges. In the event that you have to return the car because you can no longer afford to make payments, immediately talk to your car finance company and ask them what steps you need to take to return the vehicle and minimise paying other charges.