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Car finance: How do I settle a PCP early?

What you need to know about early settlement of your PCP agreement

Most car dealerships are rubbish at explaining how various car finance products work. This is clear from the number of search enquiries we receive every day.

Today we are answering one of the most common PCP finance agreement questions: What if I want to terminate the agreement and settle my PCP early?

There is a lot of confusion about ending a PCP agreement early, and a lot of that confusion comes about because people are looking for easy answers that simply don’t exist. In reality, it’s quite simple. You have borrowed a large amount of money to buy a car, and that money needs to be repaid.

You can repay this at any time if you have the money available to do so. However, the reality is that most people don’t have the thousands of pounds usually required to settle their finance and are looking for other options.


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How does a PCP work again?

A lot of the confusion about settling a PCP early comes from borrowers’ misunderstandings about how a PCP actually works in the first place.

When you take out a PCP, you will usually put in an upfront payment (referred to as a deposit) and borrow the rest of the money required to pay for the car. So if the car costs £30,000 and you put in £2,000 deposit, you will borrow the remaining £28,000. The finance company pays the dealer £28,000 and you get to drive home in your new car.

   

At this point, you will owe the finance company £28,000 interest and fees – let’s call it a nice round £30,000. This is your debt, and it needs to be repaid. Until it is repaid in full, the car remains the property of the finance company.

To repay this debt, you will have three to four years of monthly payments and then a balloon payment. In this example, that would probably mean monthly payments of £400-£500 and a balloon payment that’s probably anywhere from £10,000 to £15,000.

The key to a PCP is that the finance company offers a guaranteed (minimum) future value that is equal to the balloon amount. That means you can give the car back at the end of the agreement, or part-exchange it with a car dealer on another vehicle, instead of paying off the balloon. However, that only applies at the end of the agreement, not during the agreement.

A PCP is designed to work out neatly if you run it for the full term of the contract. If you want to settle up early and get rid of your car, you will probably find you have a negative equity problem thanks to the car’s depreciation.

What are depreciation and negative equity?

From the moment you drive off in your new (or used) car, it starts losing value. This is called depreciation. It happens much faster early on, and then slows down the longer you keep the car. This is because the price you pay for a car from a dealer will include the cost of the car the dealer’s costs and profit margin, a large dose of VAT if it’s a new car.

Graph of PCP - depreciation vs finance outstanding
Depreciation vs finance outstanding (click to enlarge)

Those costs push up the price you pay but they don’t add any value to the car, so once you drive away from the dealership your car is effectively worth thousands of pounds less than what you just paid for it. So your car’s value has dropped by thousands of pounds but you’re only paying off a few hundred pounds a month so your debt isn’t dropping anywhere near as quickly. This creates what is called negative equity (the grey area in the graph to the right; it’s simply an example and the actual result will be affected by many factors).

Negative equity is what you get when you owe the finance company more than what your car is worth, and on a PCP you spend almost all of your time in negative equity. Even if you were able to sell your car (and usually you’re not allowed to because it’s not yours to sell), the money you got for it wouldn’t cover your debt.

In theory, the value of your car and the amount you owe the finance company should come back together again at the end of the agreement. At any point before that time, you will have negative equity.

What does that mean if I want to settle early?

Generally, it means you have a problem. You owe thousands of pounds (all your remaining monthly payments, the balloon amount, minus some minor interest savings), which you probably don’t have in your bank account.

Let’s look at the simple example graph above, which is based on borrowing £30,000 and having a GFV of £15,000 after three years. If you wanted to try and get out of your agreement after one year, you would owe £25,000 (actually slightly less because you would save a few hundred pounds on interest by settling early). If you want to settle after two years, you’d owe £20,000 (again, it would actually be slightly less).

You’re almost certainly not allowed to sell your car privately, because it’s not yours to sell. Some finance companies may allow it under certain circumstances, but will probably require the buyer to pay them directly, rather than paying you and then you paying the finance company.

Usually, a finance company will allow you to sell the car to a dealer because the dealer will settle the finance. However, a dealer will usually want to sell you another car rather than simply buying yours, so finding one that will buy your car and settle your finance may be difficult.

And even if you are able to sell the car, its value will be significantly less than your settlement figure, so you’d still be a few thousand pounds short. You would have to pay those few thousand to either the finance company or the dealer before the debt is considered settled.

Will my car ever be worth more than the settlement?

The whole point of a PCP is to guarantee the value at the end of the agreement (guaranteed future value – GFV).  This means that if the car’s market value is less than the GFV, the finance company will lose money. As a result, they will want to make sure they are not setting the GFV too high.  So it is possible that the car could be worth more than the GFV at the end of the agreement.

It certainly used to be the case that finance companies were quite conservative in their GFV predictions, and customers would end up with a car that was worth a handy sum more than the settlement figure (called equity or positive equity, and obviously the opposite of negative equity). This money would almost certainly be used as a deposit for another PCP agreement.

However, as the market has become more competitive, the situation has changed. More finance companies appear to have increased their GFV predictions, which makes your monthly payments lower but makes it much less likely that you will have any equity in the car at the end of the agreement or any point during the agreement.

It is now very unlikely you can ever settle a PCP early and be in a position where your car is worth more than you owe.

What about voluntary termination?

Every PCP agreement has a clause built in outlining your . This provides you with the right to give the car back once you have paid off half of the total amount payable. Voluntary termination is looked at in detail here.

However, due to the way that a PCP is structured (usually a low deposit, low monthly payments and a large balloon amount), you will probably only reach the point where you can give the car back a few months before the end of the end of the agreement anyway. So it’s great if you hit trouble three months before the end of the agreement, but no use whatsoever if you’re only a few months in (or even a couple of years, in many cases).

So does that mean I’m screwed?

Unfortunately, there’s not usually a good outcome if you want/need to change your car before the end of the specified term. The reality is that you will usually have to find several thousand pounds to settle a PCP early. This is the nature of a secured loan on a depreciating asset, where you’re paying for a product you don’t own and is losing value faster than you’re paying it off.

You should the finance company and discuss your situation. If you are suffering from genuine financial hardship, they may be able to offer alternative payment terms to help you work through your problems. You will probably end up paying more in the long run, but you may get some short-term relief. However, don’t pin your hopes on the finance company being too helpful – their first response will always be to insist that you pay what you owe.

If you are wanting to settle your PCP early because you’re trying to buy another car, you may find that there are deals on offer that will help you with your negative equity. Be very careful, as you may be simply setting yourself up for more problems on your next car, and you could find yourself back in the same position, or an even worse position, very quickly.

If you genuinely can’t settle your debt, you may have to accept voluntary surrender. This is a very different thing to voluntary termination. You give back the car but still owe whatever is left to pay (and the finance company will add on extra costs for collecting and disposing of the vehicle). This is pretty much a worst-case scenario, as the finance company will still be chasing you for money even though you’ve already given back the car.

Should I settle a PCP early or keep it until the end?

A PCP agreement is set out to be financially optimal to run it all the way to the end of the agreement. The reality is that most times, you’ll have to pay out a substantial sum of negative equity to settle a PCP early.

Whether or not it is worth paying to settle the finance depends on how important the need is to change your car or get rid of it.

Circumstances change, and the cost of paying to get rid of the car now may be better than paying more to keep it for the rest of the agreement. Alternatively, your car may no longer be suitable for your needs, and the cost to change may be worth it to you.

Is it simply impatience that makes you want to change your car early? In that case, understand that you’ll be paying a high price to settle your PCP early instead of finishing it as scheduled.

The dealer who sold you your car will often you several months (or even a year) before your PCP is due to finish. They will try to entice you to buy a new car ahead of schedule with an early upgrade offer. Sometimes these offers are advantageous. But usually, they’re a bit of smoke and mirrors, and not really worth it.

You should plan your purchase carefully to make sure you are not destined for an expensive problem in a few years’ time.

This article was originally written in June 2014 and was comprehensively updated in July 2018 to provide clearer explanations of how a PCP works

If you choose to settle a PCP early, you are responsible for paying off any negative equity

For the best independent and impartial car finance advice on the internet, always check with The Executivecondominium:

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Stuart Masson
Stuart Massonhttp://executivecondominium.info/
Stuart is the Editorial Director of our suite of sites: The Executivecondominium, and . Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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493 COMMENTS

  1. Hi Stuart,

    I am around 2.5 years into a 4 year pcp and I am about to apply for a self build mortgage, which is tricky enough to get nevermind with a £400 per month pcp conract. I have been told by my broker that this monthly payment will severely affect what the mortgage companies will offer me, a reduction of between £30-50k.
    I am aware that I could hand the car back under VT but is it possible I would be able to pay off my monthly payments in advance and keep the car until the end of the term?

    Thanks in advance
    Chris

    • Hi Chris. Most finance companies will allow you to make overpayments, although there may be a fee. Some may even be happy for you to pay all of your monthly fees in advance, although this probably won’t affect the balloon payment amount or timing. Speak to your finance company and see what they have to say.

      Be aware that this might not actually help your mortgage application, however. The mortgage company will see from your credit history that you have a car finance agreement of 48 months that is still running, so they will assume that you are making regular payments. Only concluding the agreement, whether that is by VT or other means, will show that the finance agreement is finished and that you no longer have any financial commitments associated with it.

  2. Hi Stuart, I have 6 months left on a 3 year PCP with Mercedes Finance. I would like to change to a different make. As expected, the new dealer made an offer for my Mercedes that was less than even my GFV. I wondered if it’s allowed to make the final 6 payments on the Mercedes in advance and hand the car back? After all, I would have thought it’s in Mercedes advantage, they get all the monthly payments and the car back with less miles and a bit newer than waiting another six months when they get the car handed back anyway. Thanks.

    • Hi Bill. Would those six payments cover the negative equity between your car’s current value and the GFV? If so, I’m sure the dealer would be happy to arrange it for you.

      I’d also check your pricing with the dealer where you’re planning to buy your next car. They may offer you a better price for your car, although probably not a lot. It’s a buyer’s market at the moment, so make sure you shop around to get the best deal possible. Also, have a read of our article about part-exchange values.

  3. Thanks Stuart, I have just checked the valuation with CAP-HPi (amazingly free service). They put the valuation for a trade-in at £17,750 for top price excellent. According to their definition of excellent my car is better than excellent! My GFV is £17,500, so I should be able to save some interest payments and end the PCP early and as long as they do indeed give the top end for my car its all fine. As your other article says, dealers have about a 3k margin for re-sale and CAP-Hpi reckon the forecourt price should be £19,500 to £20,750. I see on Autotrader, franchise dealers have clones of my car/same mileage for 21 to 24k.

    • Bear in mind that CAP-HPI and other valuation service don’t actually buy cars, they simply monitor what has been (in the past tense) going on in the marketplace. Ultimately it’s worth what someone is prepared to pay for it. For a contrasting position, check its value on a car buying site such as We Buy Any Car. You’ll probably find they’re offering less than CAP-HPI suggests.

  4. Hi Stuart – Planning to buy a Skoda with PCP – I plan to cancel within 14 days to benefit from deposit contribution etc – Is it a statuary right that I can cancel with 14 days for no penalty with any finance provider? -except small interest amount for time loan is take out ?

    • Hi Chris. Yes, it is your legal right. Any finance agreement has a 14-day cooling-off period during which you have the right to withdraw. Technically you are not cancelling, you are withdrawing, so the agreement never exists. The finance company can charge you interest for the period of time you have borrowed their money (which will only be a few pounds), but they can’t charge you any fees.

    • And just to be absolutely clear, the contribution sum provided by the pc company cannot normally be clawed back?

  5. Hi – I am thinking of getting a 2012 Porsche 911, second hand, 32k mileage, with a price of £50,500.00 with a deposit of £10k, I will keep the car for one year, the monthly amounts are £599.61 for 47 months. Is this monthly amount vatable? I have never used finance before and making sense of GMFV is bewildering. If I settle early as I keep cars for about a year do I just not pay back the figure borrowed less the amount paid over the year, this area is I think made wilfully difficult by some lenders, many thanks

    • Hi Menpal. If you only intend to keep the car for one year, then a 48-month PCP is almost certainly the wrong kind of finance agreement for you. You will probably have considerable negative equity in your agreement, meaning your settlement figure will be more than the car is worth.

      You can settle your PCP early, and some very quick maths suggests that after one year you will owe £33,300 + any interest + an early settlement fee.

  6. Hi
    I took an 18-month-old Toyota Aygo on finance about 6 months ago, put down a sizeable deposit in exchange for monthly payments of only £80. But circumstances have changed and I need a bigger car. Will Toyota let me upgrade or is it going to end up with me losing my cash deposit (£1300), and having to pay a negative equity fee and then having to find the deposit for something new and bigger?

    • Hi Billy. You will probably find it’s a very expensive proposition to change your car and settle your finance agreement after only six months. Your deposit is gone, and you are probably still in significant negative equity.

  7. Hi Stuart,

    I’ve been reading this thread with interest and wonder if you might be able to confirm/clarify/debunk an offer that I’ve been given by a nameless main dealer on a used car purchase on PCP. I’m in the fortunate position where I can buy the car outright by using cash and an old banger that I’m going to be trading in but as a sweetner the dealer has ‘offered’ me finance with a deposit contribution. The used car is valued at £33,500 (+ the cost of a few extras like alloy and bodywork ) and the trade in value of the old car is £2k. I’ll be making a deposit of £11k and the dealer has offered to throw in £1,250 as a deposit contribution on 48 month PCP. The total finance is £19,500 and I’ll be paying £248pm (10.5% APR).

    Now I know that I can cancel the agreement within 14 days and just take the cash contribution but I quite liked the sales guy (he was helpful and seemed ‘honest’ – I’m no fool so I’m happy to admit this) and when I asked if he would lose out on commission he told me that the finance agreement would need to be in play for 10 months to avoid it being clawed back. I asked what the net effect of the £1,250 deposit contribution would be if I did this and he said it would net down to about £750.

    I like a deal and I’m happy for there to be some mutual benefit but I’m now wondering whether the figures stack up and if I’m making a rod for my own back for the sake of £750! I intend on keeping the car and my original plan was ‘cash is king’ but £750 will cover the cost of fuel for 6 months so maybe its not a bad deal … what are your thoughts on this?

    Paul

    • Hi Paul. Have a read of our article on deposit contributions, as it covers exactly this situation.

      The dealer is probably not throwing in the extra £1,250, although they may be providing part of it. The rest will be coming from the manufacturer and/or the finance company.

      Unless there is a clause written into the contract (and there never is), they can’t claw back any of the deposit contribution if you withdraw from your finance agreement within the 14-day cooling-off period. The sales exec will lose out on that aspect of his commission (could be £20-£50, maybe), but he will still get his commission for selling you the car so you don’t need to feel sorry for him.

      The 10-month excuse is almost certainly nonsense. Yes, the finance company will normally withhold its commission to the dealer for 2-3 months in case you cancel the finance, but not 10 months.

  8. Thanks Stuart, that’s a great help. It’s not that I don’t trust the dealer, and I want him to get his cut, but there was something about the 10 month tie in which didn’t seem to make sense. I’ve ed him and asked for a further explanation and if there’s any update I’ll post it on here. All the best.

  9. Hi Stuart. I have a similar question. I am looking to by with cash and no part exchange. The dealers salesman has told me that if I take out a PCP they will reduce the car price by £1500. He tells me that I can pay it off (ask for a settlement price) at any point with no penalty charges etc. So whilst I am happy to get £1500 off, I’m nervous that if I pay it off after a month that I’m going to get stung on the settlement price or worse, that the £1500 I got off doesn’t cover my overall savings. Can they inflate the price or charge early penalty even if I’m told I can settle at any point? I’m feeling that paying full price might just be simpler?
    Thanks Simon

    • Hi Simon. Have a read of our article about deposit contributions. You can withdraw from the finance agreement within 14 days, and the only cost will be the interest accrued before you cancelled (which will be a few quid at most). Unless there is anything written into your sales contract (and there never is), they have no grounds to try and claw the deposit contribution back.

  10. Stuart,
    I have a motorbike PCP deal. I paid £3500 deposit, £14.999.00 was the cost of the bike, under the termination section it says £8.892.92 is half the total amount payable, I pay £173.19 pm, all of the payments added together (36) don’t add up to half the amount payable. Does this mean I will have to pay a lump sum to terminate at any point in the agreement.
    My circumstances have changed and after June this year I will no longer be able to afford repayments.
    Any advice?

    • Hi Shawn. You need to add your £3,500 deposit to your monthly payments, as that’s part of the total amount payable. Do that, and you should find that you cross the VT point after 32 months.

      You can VT at any time, but you will have to pay whatever you still owe to get to the 50% point.

  11. Hello Stuart!

    I’ve come across this article a few times as I’m struggling with my PCP I’m now on my 4th car and tend to change it each year and get the new model but that means new PCP contract.
    Since I know that if I try and exit now (as personal circumstances are making payments tricky) I will be stuck with the large negative equity or other. So I was thinking to try and hold out until they offer me another car , typically a year early to the 3 year period again, enter a new contract (since they buy back and settle the old/current contract) and use the 14 day legal right to terminate the new contract in the cooling off period, could this work do you think?

    • Hi John. No, that won’t work. Your 14-day cooling-off period on the finance contract doesn’t apply to the vehicle purchase itself. If you withdraw from the finance agreement, the finance company will simply invoice you for whatever you borrowed.

  12. I am planning on getting a 2015 Porsche Cayenne, second hand, 10k mileage, with a price of £41.5K. with a deposit of £5k on PCP, monthly £490 for 36 months with final payment if 27K. I have never used finance before and making sense of it all through the earlier threads too. I am just going through the agreement which was sent to me before i signed anything.

    Question 1. Termination – the following is the clause in the agreement what does this mean?

    “You have a right to end this agreement. To do so, you should write to the person you make your payments to. They will then be entitled to the return of the goods and to half the total amount payable under this agreement, that is £24,880.88. If you have already paid at least this amount any overdue installments and have taken reasonable care of the goods, you will not have to pay any more.”

    Q2. What happens if I want to come out after 1 or 2 years? I am not planning to pay final payment to own the car at the and I need the flexibility to come out of the agreement, if circumstances change etc with a huge charge.

    Many Thanks.

    • Hi Harry. For more information about the termination clause and your rights, have a read of our article about voluntary termination of a PCP.

      If you are planning to change the car after two years, the best advice is usually to get a two-year PCP rather than a three-year PCP. These types of finance are designed to run over the whole term, and ending them early will almost always result in a negative equity position that you need to resolve.

  13. Hi Stuart

    Interesting article, thank you.

    My situation is slightly different though

    I purchased a Range Rover Sport on PCP for £42,000 over 4 years @ £590 /PCM

    After just one month, the car was stolen. The insurance paid out £38k but the remaining balance with interest was £12k – The PCP arrangement was for £42k + £8k of interest assuming the agreement ran the full course of 4 years. I am not sure what the residual was.

    The finance company called us about 10 times a day and sent letters everyday the moment the £38k was paid by the insurance. They were calling for the remaining balance of £12k. In a panic and in fear of getting bad credit as they advised i paid the £12k. The contract has now ended, however, after reflecting and having time to think, i can’t help but wonder if actually paying the full amount of interest at £8k was not right and that i should not have paid it.

    Surely after only having the car for a month and then paying the balance off in full, i would not need to pay £8k in interest? That seems a lot to me.

    Is there any advice you can give me at all? I fully appreciate that as the insurance paid out £38k and i paid £42k for the car then at the very least i would need to pay the additional £4k and some interest but it can’t be an additional £8k can it?

    Thank you for your time and for reading this. I look forward to any help you can give

    J

    • Hi James. You are correct that if you are settling a four-year PCP after only a month or two, you should be paying a reduced settlement figure based on a substantially reduced interest amount.

      Now that you’ve handed over the money, it may well be hard work to recoup the difference. You can the finance company to point out what has happened and ask them to confirm the numbers to provide you with an appropriate refund, but you might be up for a lengthy and possibly fruitless chase. You could try ing the Financial Ombudsman to see what they recommend as well.

  14. Hi Stuart,
    I’m 28 months into a 48 month PCP and plan to voluntary terminate in a couple of months or so once I reach the 50% payment criteria due to a change in life circumstances…..
    Assuming this goes to plan my intention was to fund another car to meet current curcumstances in full via a personal unsecured loan as I have the credit rating to achieve some of the better interest rates which makes it an affordable option.
    My question is will the VT effect my credit rating at a crutial point of application, I can obviuosly see the loan on my credit file and assumed, like previuos PCPs paid in full, it will disappear without any detromental effect on my score and therefore future ability to achieve best possible loan.
    Many thanks
    Paul

  15. Hi Stuart
    I purchased a second hand Clio on PCP.
    I have had to have the car repaired on a few occasions, none of which were wear and tear, all were faults with the car.
    The latest one is a pipe for air conditioning, I have been waiting since June for this part and now they tell me it will be end of September at the earliest.
    I want to terminate this agreement early, do you think that I would have grounds for this considering the amount of times the car has been in for repair, without penalty. I have no confidence in the car any more.

    Regards

  16. Hi Stuart. So I have 15 months left on a 48 month pcp contract. I am led to believe by Mercedes finance that I am in negative equity. Even if I have gone over the 50 % contract term can I still do a VT? I’ve gone over my mileage (roughly 3000 miles). When / if I VT do I need to pay the excess mileage?

  17. This is brilliant article and love the support you show all of us – I bought a 2015 Audi Q5 (£24k) and pay about £400 a month – I have 4 years left on it (only got it a year ago). It is possible to, say, go to a dealer and sell the car back to them and then get a smaller car that’s worth, say, £10k? ie, then my repayments will be lower and the dealer can deal with the finance on the Audi?

    Or do I need an equivalent car worth +£20k every time?

    • Hu Gyan. To get out of your current car now, you will need to settle the outstanding finance. Once that’s done, your next car can be as cheap as you like or as expensive as you can afford – it’s a new finance agreement and not connected to your current finance agreement.

  18. Fascinating article. My finance provider for the PCP doesn’t take big deposits but allows “Partial payments” (lump sums) during the agreement repayment. “If you wish to make a partial payment you must us and inform us if you want to reduce the monthly repayments or shorten the remaining term. Once the payment is made the finance Agreement will be re-calculated and confirmation will be sent in the post.”

    This will reduce the monthly payments as desired but my question is will it reduce the interest charged (also desired)? Or does the interest charge for credit levied at the beginning of the agreement still stand?

    Many thanks

    M

    • Hi Mark. Yes, making additional lump sum payments will reduce your interest as you have less money borrowed for the remainder of the term. When you make a lump sum payment, the finance company will recalculate the amount outstanding to allow for this.

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