Should I pay off my PCP car finance early?

Hoping to cut your PCP contract short? Here’s all the info you need, whether you want to hand the car back and walk away or trade up early

John Evans
Sep 30, 2019

Personal contract purchase (PCP) finance is one of the most popular ways to aquire a new or used car. You place an initial deposit - typically around 10% of the cash price, though it can be lower or higher - and then pay off the remaining balance through a series of monthly payments over the length of the contract. These payments are dictated by the car's residual value - the better the car retains its value, the less you can expect to pay each month.

Used car PCP finance deals

At the end of the term - typically three or four years - you can then decide whether to pay what's known as the optional final payment (effectively the remaining value of the car) to buy the car outright. Decide not to do this and you can either 'part-exchange' it, putting any additional value in the car over the remaining balance - known as equity - towards the deposit on a new finance deal, or simply hand the keys back and walk away.

But what if you want to settle the finance early before the end of the contract, buying it there and then? Or you cannot afford the payments and want to get out? There are important distinctions between the two, with pros and cons for each. Keep reading to find out which course of action is best for you.

Why can’t I just end my finance there and then?

The key thing to remember about a PCP finance is that you’re making fixed payments on a car that loses value fastest when it's new, slowing as it gets older. This means that for most of the PCP contract, the remaining finance balance left to pay amounts to more than what the car is actually worth. At least until the end of the agreement, that is.

At this point, the car should be worth around the same as the optional final payment. If you've looked after the car well, you may find it is worth more than the remaining balance, in which case you can put this additional value towards the deposit on your next car, cutting your monthly payments.

It's this element of PCP finance that complicates things when you try to cut short your agreement part way through the contract. You can't just hand the car back to the finance company and walk away, because for the vast majority of the contract it's worth much less than the remaining balance owed to the finance company. So, even if you handed the car back early, you can expect to be chased for an additional payment to settle the finance, potentially including fees and extra interest on top.

For these reasons, it's crucial that you do not simply just stop making payments if you plan to return the car early. It's best to talk to the finance company and be transparent if you are having problems meeting the payments. Do this and you should be able to tie up the contract with the fewest issues.

 

When can I settle a PCP early?

You can settle a PCP deal at any stage by paying the settlement figure – in other words, the outstanding amount at that moment in time – which you can request from your lender.

The car is then yours to keep or resell. The lender can only charge you up to two months' interest on the balance when calculating the settlement figure, so this should reduce the amount of interest you pay compared with continuing with the finance.

Audi A3 Saloon side

What are the pros and cons of settling a PCP early?

Pros:

Settle early and you own the car with nothing more to pay. This is a good idea if the settlement figure is less than the sum of your remaining payments. This is only likely towards the very end of a PCP finance deal.

Alternatively, you can resell the car and clear your debt - with a little extra cash in your pocket if the car is worth more than the remaining payments - or you can trade it in and put that additional value, the equity, towards a new deal. Bear in mind that since you don't own the car, you'll have to get the buyer to pay the finance company directly, as the company still owns it.

Even if you settle the finance, you should still benefit from any finance incentives (such as a discounted price in some cases, a minimum part-exchange offer, deposit contribution discount, free or cut-price servicing, free equipment packs and so on) that you may have received when you took out your PCP.

By settling early you simply reduce your interest bill on the loan, cutting the overall amount you pay.

Cons:

You must have the money to pay the settlement figure. Alternatively, you can finance this figure, though do this and you'll end up paying interest and will want to make sure that this amounts to less than simply continuing with the original contract.

You can't raise this money from the sale of the car because it is not yours to sell until you’ve paid the settlement figure and the title has been transferred from the finance company to you. It is possible, however, to negotiate a sale with the finance company, getting the new buyer to purchase the car directly from the company.

Can I just return the car? Use voluntary termination

Under the terms of the Consumer Credit Act 1974 you can return a car on PCP finance or Hire Purchase with nothing more to pay if you have paid at least 50% of the total cost of finance - this means at least half of all the monthly payments, the optional final payment and interest added together. This is called a voluntary termination.

Hyundai i10 front

Pros

Use voluntary termination and you could pay less overall than continuing with the finance if the car is worth less than the sum of the remaining payments.

If you can't afford further payments, doing this can help you to avoid getting into debt and missing payments, which would jeopardise your credit rating, in turn making it more difficult and more expensive to take out finance.

Cons

To settle the loan could be very expensive if you haven't already paid half of the overall finance balance, so it’s not a right you may be able to afford to exercise.

Furthermore, the stage at which you've paid off more than 50% of the car's total debt is likely to be towards the very end of the contract with PCP finance - especially for cars that retain their value very well.

In some cases, where the car is worth more than 50% of its original value at the end of the contract, you'll never get to the stage of having paid off half the car's value during the contract term and being able to use voluntary termination.

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