Should I pay off my PCP car finance early?

Thinking of cutting your PCP finance agreement short? We've got all the information you need before going ahead

John Evans
Aug 5, 2019

Personal contract purchase (PCP) finance is a popular way 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 a 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 own the car outright. Decide not to do this and you can either 'part-exchange' the car, putting any additional value in it 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? 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 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 monthly payments and optional final payment amount 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 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 a 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 interest.

For these reasons, it's crucial that you do not 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.

 

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.

Audi A3 Saloon side

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

Pros:

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.

You can resell the car and clear your debt, or put the money towards a new deal. Bear in mind that since you don't own the car, you may have to get the buyer to pay the finance company directly, as the company still owns it.

Even though you’ve settled the finance, you still benefit from any finance incentives (such as a discounted price in some cases, 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 reduce your interest bill on the loan.

Cons:

You must have the money to pay the settlement figure.

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.

Can I just return the car? Use voluntary termination

Under the terms of the Consumer Credit Act 1974 you can return the car 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, optional final payment and interest. This is called a voluntary termination.

Hyundai i10 front

Pros

You would save money if the car was worth less than the sum of the remaining payments.

If you can't afford further payments, you avoid getting into debt and missing payments, which would jeopardise your credit rating.

Cons

To settle the loan under the terms of the Consumer Credit Act 1974 could be very expensive, 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. 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.

Affordable used car finance deals

Read more about:

Latest advice

  1. New vs used: reasons to choose a used car

  2. Best used cars with parking sensors for £7,500

  3. The best used cars with sat nav for £10,000

What our customers say