What does an annual mileage mean?

When buying a car on finance or looking for insurance cover if you already own your dream wheels, one of the most common questions asked by lenders and insurance providers is: “What’s your annual mileage?”
 
They’re not just being nosey; the number of miles you drive each year can affect a whole host of things, from how much you need to pay on your insurance premium to the price you’ll get when offering your car up for part-exchange.
 
In the world of car finance, the term “annual mileage” is mostly associated with Personal Contract Purchase (PCP) and Personal Contract Hire (PCH) or leasing agreements.
 
With both types of finance, the lender has a vested interest in the car’s value – and mileage is an important factor in determining its resale price.
 
You’ll usually need to agree to a limit at the start of your agreement, with penalties to pay if you go over it.
 
But what does an annual mileage really mean and how can you calculate yours? Let’s dive into the details:

What exactly does annual mileage mean?

The dictionary definition of annual mileage is the distance a vehicle has travelled in one calendar year. It includes all trips made in your car and is usually measured automatically by the odometer set in your dashboard.
 
While you might need to provide an estimate of your annual mileage before agreeing to a PCP finance agreement, long-term lease, or car insurance policy, it’s the exact figure tracked by your odometer that really counts.

How can I calculate my own annual mileage?

There are a couple of ways that you can calculate your annual mileage (time to fire up your calculator.)
 
One of the most straightforward ways is to check your MOT certificates. If you’ve owned the same set of wheels for a while, you’ll probably have at least two years of MOT certificates to compare. Each certificate lists your mileage during the test; simply subtract last year’s figure from this year’s number to determine your annual mileage for the previous year. Comparing a couple of years can help you find an average just in case your habits change over time.
 
Another way to get an estimated annual mileage is to use one week as a benchmark. Try to choose a typical week (not that one time you got sick and didn’t leave the sofa for four days) and take note of the number on your odometer at the start of the week and at the end. The difference between these two figures is your average weekly mileage.
 
Next, multiply this number by 52 to get an approximate annual average. Don’t stop there though – it’s always a good idea to add in a few miles to give you a little wiggle room and cover any holidays, road trips, and emergency journeys.

What factors should I consider?

To help you estimate your annual mileage more accurately, there are a few different factors to consider.
 
It might help to break your driving habits down into categories.
 
Category one will cover all your everyday trips, those journeys that stay the same week after week like:

• Your daily commute to and from work
• The school drop-off and pick up
• Your weekly trip to the supermarket
• Trips to your weekly yoga class or five-a-side training

Your next category should include the less frequent trips that happen a few times each month or once or twice a year:

• Social trips like driving to town or nearby attractions
• Longer trips to visit friends or family
• Holidays
• Hospital appointments

Finally, category three is all about the year ahead – especially if you’re buying a 12-month insurance policy.
 
This is where planning ahead can work in your favour (shout out to the organisers). If you know you’ll be trading in a trip to the Cotswolds for a week in the Costa del Sol, your mileage might be lower next year. On the other hand, if wedding season is going to have you hitting the road every other weekend next summer, you might want to add a few more miles into your calculations.

What happens if you go over your annual mileage?

Whether you accidentally (or accidentally on purpose) exceed your annual mileage limit, you’ll usually be charged for every extra mile. The exact amount will be detailed in the terms and conditions of your finance agreement, but it’ll typically be a few pence per mile. That might not sound like much, but trust us, it adds up quickly!   
 
The best way to avoid these extra charges is to set a realistic limit at the start of your agreement. It’s really not worth trying to cut your monthly payment by wildly underestimating your annual mileage.  
 
If you do end up needing to drive more than you predicted, you can be proactive and contact your finance provider before you reach your limit. They may be willing to increase your annual allowance in return for higher monthly repayments (which could still work out cheaper than paying the penalty charges).

Why is understanding annual mileage important?

Your annual mileage is more than just a number on your dashboard.
 
Certain finance products – think PCP and leasing – will ask you to agree to a maximum annual mileage before signing your agreement. That’s because the number of miles you drive will impact how much you need to pay each month.
 
It’s all about depreciation. That’s the industry term used to describe the value your car loses over time. Almost every car (except that vintage classic in your uncle’s garage) loses value over time but having more miles on the clock can make this happen faster. Your monthly payment helps to offset this depreciation, so the more miles you do, the more you’ll be asked to pay.
 
There can also be penalties for going over your estimated mileage – whether that’s extra charges on your finance or being at risk of voiding your insurance policy.

What can my annual mileage affect?

Annual mileage can impact a wide range of things – you might be surprised by just how many – including:

Your insurance premium

An estimated annual mileage will be part of your insurance application process and can affect how much you’ll need to pay for cover. Typically, the more miles you drive each year, the more you’ll need to pay. It’s related to risk; the more time you spend behind the wheel, the more likely it is that you’ll end up in an accident and need to make a claim.

Your insurance pay-out

If the worst does happen and you end up writing off your car in an accident or it’s stolen and declared a total loss, the number of miles on the clock will affect its estimated value and the amount your insurer will pay out. If you’ve racked up over 100,000 miles, for example, your car will be worth much less than if it’s barely ever moved off your driveway.

Your car’s resale value

Value may also be an issue if you plan to resell your car or trade it in as a part-exchange. The same rule applies; the more miles on the clock, the less money you’ll be able to ask for your pride and joy (no matter how well looked after it is!)

Your monthly finance payments

With a PCP or lease agreement, your monthly finance payment will be partially based on the car’s value. In fact, the amount you need to borrow in a PCP loan is entirely based on the car’s predicted value at the end of your loan term compared to its current purchase price. If you have a high annual mileage, the car’s GMFV (Guaranteed Monthly Future Value) will be lower meaning you need to borrow more and will likely have higher monthly payments too.