Car finance: How do I settle a PCP early?

Car finance advice
How to settle your car finance (PCP) early

Most car dealerships are rubbish at explaining how various car finance products works. 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, but in reality it’s quite simple. You can settle the agreement early, but it will probably cost you to do so.

What is a PCP?

Graph of PCP - depreciation vs finance outstanding

Figure 1: depreciation vs finance outstanding (click to enlarge)

To understand how to settle a PCP early, let’s firstly look at what happens if you finish the agreement as per the original contract.

Let’s take a theoretical three-year PCP and run it for the full three years.

Take a look at this graph (Note: example only; actual results may be affected by many factors).

For the purposes of this example, we’ve ignored both interest and any deposit, so we have a £30,000 car and £30,000 financed. The blue curved line represents your car’s depreciation over time, while the red straight line represents your finance settlement over time.

The finance company calculates the depreciation of your new car over three years, and comes up with a value of what the car should be worth at the end of that period.

This figure is called the Guaranteed Minimum Future Value (GMFV). This is the value for your car that the finance company is prepared to guarantee in three years’ time, as long as:

  • You keep under the mileage in your contract
  • You have your car serviced on time, every time by an official dealership
  • You keep your car in good condition

What you repay over the three years is the depreciation of the car from its new price down to the GMFV.

So in our example, the car cost £30,000 new and the finance company sets a GMFV of £15,000 after three years. Your monthly payments over three years are repaying £15,000 of depreciation. If you want to keep the car then you still owe another £15,000 to pay off the rest.

Your monthly payment is the same each month. That means the finance remaining (red line in the graph) follows a nice straight line. It decreases by £5,000 each year to reach £15,000 after three years.

However, your car’s value (blue line in the graph) does not follow a nice straight line. It does not depreciate at exactly £5,000 per year.

Depreciation is a curve. You lose a lot of value early on, and then the curve flattens out over time. As a result, the car’s value drops well below the settlement in the first year, then starts to gradually catch up again until they meet after three years.

So, at the end of the agreement, everything comes together nicely. The settlement figure is £15,000 and so is the car’s value.

But wants happens if you are not able to wait until the end of the agreement and need (or want) to change your car early?

The segment of the graph marked out in grey, between the two lines, is called negative equity. This is the difference between what your car is worth and what you still owe to the finance company.

You can see that at any point before the end of the agreement, the car’s value is less than the amount owing. This means if you want to sell the car, you will not have enough to cover what you owe. Therefore you will have to pay the difference owed to the finance company to settle the finance.

What if I have a large deposit?

If you want to settle a PCP early, you will have to pay any negative equity

Figure 2: depreciation vs finance outstanding with a large deposit (click to enlarge)

As mentioned, the above example assumed no deposit, which almost never happens.

The more deposit you put in up front, the smaller the negative equity issue is going to be during the term of the agreement.

Have a look at the second graph (right). Having a large deposit to start with means that the settlement graph starts off well below the car’s value.

The car’s rapid initial depreciation means that its value still drops under the settlement figure during the agreement, but only slightly.

So if you wanted to settle a PCP early and have put in a large deposit, you will probably only have a minimal negative equity position.

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 Minimum Future Value – GMFV).  This means that if the car’s market value is less than the GMFV, the finance company will lose money. As a result, they will want to make sure they are not setting the GMFV too high.  So it is possible that the car could be worth more than the GMFV at the end of the agreement.

This means that if your car’s market value is less than the GMFV, the finance company will lose money. As a result, the finance company will want to make sure it is not setting the GMFV too high. So it’s possible that your car could be worth more than the GMFV at the end of the agreement.

It certainly used to be the case that finance companies were quite conservative in their GMFV predictions, and customers would end up with a car that was worth a handy sum more than the settlement figure. 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 GMFV 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.

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.

Other factors to consider when settling a PCP early

These simplified examples show the relationship between a car’s value and its outstanding finance. However, the exact position will be different for each case.

Factors affecting a car’s depreciation curve include:

  • Mileage
  • Condition
  • Specification
  • Model cycle (for example, when a manufacturer launches a new model, the old model will drop in value)

The factors affecting a PCP early settlement figure are generally interest and fees. The more interest you are paying on the finance, the greater the negative equity amount is likely to be.

Your termination rights

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

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 contact 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.

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

Stuart Masson
Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car 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.

445 Comments

  1. Hi, very interesting site.
    I have a question and will try to explain it as best I can. At the end of the pcp agreement, let’s say 2 yr term, the final value was fixed at £7000 by the finance company. At this point you take the vehicle back to the dealership and the market forecourt value is let’s say £8500 for an identical car. Does the finance cmpy allow this difference as your deposit on another agreement £1500? Or only allow what the dealership would buy it for ? bearing in mind that the dealers would want to make a profit on it? I suppose another way of putting it is——–is the final value a trade price (what the trade would pay for it) or a retail price .
    Thanks

  2. stuart

    Hi Andrew. The price a dealer will buy your car for is obviously less than they will sell it for, as they will need to add their costs and profit margin to get to their sell price. If they are advertising an identical car for £8500, then chances are they paid £6000-6500 for it.
    The final GMFV value (£7000 in your example) is what you owe the finance company. If you can get anyone to pay you more than this for the car, then you still have to pay the £7K but you keep the difference. If the car is worth less than the GMFV but you have fulfilled all the requirements of the PCP, then they guarantee to honour the GMFV and give you £7K for it to clear your finance. If you sell it to a dealer or part-exchange it, then yes you will be getting a trade price.

  3. Hi,

    I bought a car in November 2013 £34k with £12k deposit. I hardly use the car as I commute by train for work. I have done only about 4k miles since owning the car. How can end my contract and what sort of return am I looking at from my initial deposit?

    thanks

  4. stuart

    Hi M3. As outlined above, you can sell the car but will need to settle the outstanding finance. Since you had a large up-front payment, you may be lucky and make enough from the sale to cover the finance. Contact your finance company to get the settlement figure. If you are selling the car to a dealer, the dealer will settle the finance; if you are selling it privately, then the finance company may want your buyer to pay them directly rather than paying you and you settling with them.

  5. Hi
    I have around 6 months left on my PCP and have been told by my dealer that my car has £1800 equity against a new car. I am considering getting my next car through the NHS lease car scheme. If I hand my car back in 6 months and there is still some equity will I get the difference back from the finance company?
    Or am I able to sell my car if there is finance outstanding on it and then pay it off?
    Any advice would be appreciated!

  6. Hi
    I have around 6 months left on my PCP and have been told by my dealer that my car has £1800 equity against a new car. I am considering getting my next car through the NHS lease car scheme. If I hand my car back in 6 months and there is still some equity will I get the difference back from the finance company?
    Or am I able to sell my car if there is finance outstanding on it and then pay it off?
    Any advice would be appreciated!

  7. stuart

    Hi Jools. If you simply give the car back at the end of the PCP, you will not get any equity – you simply give it back and the finance company either wins or loses depending on how much it’s worth against your GMFV/settlement. You can sell the car yourself which may yield you a higher amount, in which case you can keep any equity over and above the GMFV/settlement figure. Check with your finance company first, as they sometimes have strict conditions about selling the car privately (the buyer may have to pay the finance company directly for the settlement figure, rather than paying you and you then paying off the finance company).

  8. I am currently looking to buy a new vw cc and at present vw are offering £4000 off the price of a the car if you take it through their finance. In order for us to get this deal we have been informed that the only way we would get this is if we take out the finance and then after one month we could clear off the finance and it would only have cost us the first payment of around £300+. The salesman said that is correct but it would still save us around £3,600. I am really unsure of this, can you please advise me if this is correct. I have the money to pay it outright and can’t believe I can’t get the same deal with cash in hand. I am treating myself as I have just retired and don’t want to get stung, can you please advise me. Thanks Dave

  9. stuart

    Hi David. Rather than wait a month and pay fees + interest, you can cancel the agreement within 14 days of the finance being activated and pay no interest or fees whatsoever. You will immediately be invoiced by the finance company for the amount financed, which you simply pay them. You will still have benefitted from the deposit contribution as they can’t really reclaim that from you (sometimes they try it on, but usually they don’t bother because they know they can’t).
    The salesman probably wants you to wait until the first payment has come out so they get their commission on the finance sale. Never forget that everyone you talk to at a dealership has a financial interest in everything they sell you…

  10. Hi Stuart,

    Your site is very helpful – thank you. I just have a quick question, I wonder if you can lend any advice please? I entered into a PCH deal for a Fiat 500 in Jan 2013 at £152 per month for 3 years. I put down a £1,000 deposit and have an annual mileage agreement of 15K. The APR is 4%. I’m happy with the car and was planning to keep it to the end of the contract, and then potentially trade in the equity as a deposit for a finance contract on a new car.

    The dealership has however just contacted me (18 months into the contract) to offer the chance to swap the car early, and has offered me the exact same model 64 plate for £160 per month, same terms and conditions as listed above. The APR is 9%. I feel that this is a good deal, particularly given that there is some damage to the car (chip in windscreen and scuffed alloys).

    Would you agree that this is a good deal and worth going for? Do you see any disadvantage to me agreeing to this offer? Should I be concerned at the difference in APR?

    Really grateful of your advice, thanks.

  11. stuart

    Hi Hannah. Have a very careful check of the specification to make sure that it is indeed exactly the same model with the same equipment. Assuming that’s all good, have a look at how Fiat has got to that price. If you are only paying £8/month more (so £288 over 3 years), but the interest rate is higher, then they may well be pricing the car a bit lower. Manufacturers will play with discount and interest rate to get to a price point, but at the end of the day it doesn’t really make a difference to you.
    By your explanation that the new T&Cs are the same as the previous agreement, I assume that you are putting in another £1000? Bear in mind that this means your previous £1000 deposit has only been spread over 18 months rather than the intended 36 months, so you are having to find another £1000 cash about 18 months sooner than expected, which is an extra cost you weren’t expecting.

  12. Hi
    I have a pcp that I pay 156 a month over 3 years with very low interest. I agreed a very low mileage for the final value. My circumstances have changed dramatically and I have now doubled the mileage agreed. What is the best thing to do?

  13. stuart

    Hi James. Normally you can contact the finance company and ask them to recalculate your GMFV and payments to account for your additional mileage. You start paying more per month to cover the lower GMFV at the end of the agreement.

  14. Stuart,
    Back in March 2014 I took out PCP on an AClass MB Agility, estimated I would do 90k miles over 4 years. Deposit, £1000, monthly £380. Total Value around £28k.

    Within 6 weeks Id changed jobs and don’t need to use the car at all! Miles are about 6,000 at present.

    Any way the finance company will reduce the payment based on lower annual miles (they do it for more miles? – flawed logic I think). In terms of sale ia think I will lose too much?

  15. stuart

    Hi Paul. No, MBFS (and any other finance company) will, at their discretion, allow you to bump the mileage up if you pay extra. But they won’t allow you to reduce the mileage and enjoy a lower payment. All you can really hope for is that because your car has a much lower-than-expected mileage at the end of the agreement, it will be worth more than its GMFV.

  16. Hi Stuart, my daughter has a vw polo 1.2 on a 3 year pcp. She pays 163 per month. At very short notice, she’s going to work in Italy and wants to get rid of car. Car is registered from 1st November 2013 so she’s not been a year yet into the agreement. How can she end the finance early? We can’t afford to make the payments for her. Any advice please ? Thanks. Kay

  17. stuart

    Hi Kay. Unfortunately the only option is to sell the car and pay the outstanding balance back to the finance company (presumably VW Financial Services) as outlined in the article above. The settlement on the finance is likely to be greater than the value of the car, so she/you will have to come up with the extra cash to pay it off.

  18. Hello, I have a 23k golf on PCP and I now need to get a mortgage and downgrade my car as it’s taking a big chunk of what I can borrow based on my income. I am 10 months into a 48 month contract payments at £350 a month. Is there a better time to swap my car, should I wait a little while or down grade as soon as possible? vw have said I won’t pay a penalty and it will be a renewal / repeat purchase but would I be better keeping the car for another year based on the most depreciation happening in the first year?

  19. stuart

    Hi Beth. It will be a question of how rapidly your car is depreciating compared to your repayments. If you settle up now, you will probably have to pay out a lot of extra cash, however you end up paying less overall (because you are saving interest on all of the last 38 payments you won’t make). If, for example, you keep the car for one more year, you will end up with less cash to pay out but will have paid more in total because of the additional year’s interest you will have paid.

    There’s no real right or wrong, it’s more a matter of working out what’s best for your cashflow and overall budget.

  20. Hi Stuart, I have a PCP with BMW finance and am now 12 months in to a 48 month contract. Unfortunately, my personal circumstances have changed and I now find due to massive drop in income I cannot afford the circa £490 pm payments (part current PCP and part negative equity loan). I contacted the BMW dealer who cannot help and also BMW FS with whom I entered into a short term agreement to pay 3 months of PCP at 50% and 3 months neg equity loan at 50% and 3 months at 150% for 3 months to bring agreement back in line by January 2015. I will not be able to pay the 150% payments as this will be circa £780 pm so again contacted BMW FS with a proposed return of vehicle via their dealer plus an affordable monthly payment to settle outstanding finance. The dealer offered £14,500 to buy car but BMW say this is unacceptable and that I should seek to increase the sale [price through other dealers or a private sale. I offered to return the car via the dealer and to pay off the negative balance at £200 pm which is just about affordable but I will be car less and likely to be unable to get credit for a new car. My understanding is that I can VT the agreement anytime under CCA but will I be liable for the whole outstanding sum and have the issue as a credit recorded default against me as BMW suggest?

  21. stuart

    Hi Paul. Sorry to hear it’s not worked out as planned. So far you’ve done everything right, but ultimately you still have a large borrowing that needs to be serviced. I doubt you will qualify to voluntarily terminate the vehicle just yet (have a read of this article about voluntary termination rights) as you need to have paid back 50% of your total amount owed and you are probably still well short of this.

    If you sell the car, you may get to your 50% to voluntarily terminate. Be very clear with BMW that this is what you want to do – if you talk about “settling the finance” they will calculate a much higher number for you to pay. Your contract should tell you the total amount payable and should have a clause on voluntary termination. Read it carefully. IF you carry it our correctly, there will not be a default recorded against you as it is your legal right to VT the car without penalty. However BMW probably won’t finance you again since you didn’t complete the loan in full.

  22. Hi Stuart,
    I really couldn’t afford to pay for the explanation you’ve just given in this article. I bought my Nissan Juke last year but soon realized that neither was the car large enough for my needs, nor did I understand any DETAILS of the PCP agreement he sold us.
    Finally I know what it is all about. Thanks to you brother.

    I was just thinking of upgrading, but now I realize I’ll be better off just being patient and wait at least until the initial 3.5 years pcp have elapsed.

    Thanks again.

  23. stuart

    Happy to help, Juked. Feel free to share a link to the site with all your friends and family via every social media network you have ;)

  24. Hi Stuart,

    Very helpful site.

    To cut a long story short. I am not entirely happy with a PCP deal I have. I collected it almost two months ago now, having signed all that was asked of me. Weeks later, the dealer contacted me to say the finance company are not happy with the signatures, as they don’t match my license. As time dragged on and me attempting to resign as requested, it appears that I have indeed signed the ‘vehicle order agreement’, but I have not been asked to sign the ‘written summary’ agreeing to the terms of finance.

    Basically, I can no longer afford the payments(very stupid of me, I know). What is my stance on this matter? Can I request return of the vehicle? Can I expect my deposit back, etc? What are the implications, essentially.

    Any advice would be great.

  25. stuart

    Hi David. Well, the dealership has erred in handing you over the car without having a signed finance agreement. This almost certainly means that the finance company has not paid the dealer for the vehicle. However, from a practical point of view, you have accepted the vehicle and have been driving it for the last two months, so you have effectively accepted the terms. Realistically, you can’t expect to simply give the car back, take your refund and walk away. Your car is now worth considerably less than it was when you took delivery, simply due to depreciation. They will expect you to pay up, and failing that, they may be interesting in coming to some agreement with you. But it is still likely to cost you quite some money.

  26. Hi Stuart, thank you for an interesting article.
    I am purchasing a Golf for £26000 and financing £18000 on PCP with 7% APR, £48 monthly payments of £260 + final payment. I will be getting a bonus from work next year of £9000 and was considering paying off the PCP with that plus a bank loan (apr 4%) for the remainder . However, having read your article would I be better off with a bank loan for the entire amount and reduce that next year if I am likely to be charged for any negative equity in the car?

    Regards

    Simon

  27. stuart

    Hi Simon. Ultimately it depends how long you plan to keep the car, and what the net costs to you will be via each method of finance. With a PCP, you only pay the depreciation cost over the total period, so your monthly payments will be less than an HP or a bank loan for the entire amount. The flip side is that you would not really expect have have any significant equity if you sell/PX the vehicle at the end of the agreement. However, if the APR is higher then you will be paying more interest on your borrowing.

    There is no right or wrong way to go about it, it depends on what you are trying to achieve in terms of cash flow vs. overall costs. Also, of course, a PCP or HP is secured against the vehicle whereas a bank loan is not.

  28. Thanks! I’ve now resolved the issue :) thanks for your help and advice!

  29. stuart

    Hi Beth. Glad it’s all sorted, hope you’re happy with the outcome.

  30. Hi,

    I have a mazda mx-5 and I’m 13 months in out of 42 months… I was hoping to get a new audi or something different as my car is a 2 seater and i think i might be better off with a 4 seater now… would i be able to just walk into an audi dealership and swap cars and pay whatever the difference is ?

    thanks, hope that makes sense

  31. stuart

    Hi fuzzysham. Yes you can go to an Audi dealer to part-exchange your Mazda, but it will involve more than just ‘swapping the cars and paying the difference’. You will need to settle your current finance contract with Mazda, which will almost certainly involve you paying out the difference between what your car is worth and what you still owe. The Audi dealer can take care of this for you, but it will still probably cost you a few bob before you can work out how much to spend on the Audi.

  32. Hi Stuart

    I can get an New Audi A6 for £2500 cheaper if I take finance. I have the capital to purchase out right, but it will be £2500 more. I was thinking of taking the finance and putting down a 50% deposit. Car is £34000 so £17,000 deposit and then funding the balance of £17000. I was then planning on paying off the £17000 in the next 3 months. I have asked the question about what the repayment charges or any penalties will be and im being told that they can not give me a figure if I settled early lets say in 3 months. Would you know what penalties or charges you normally incur (e.g 3 months of interest, etc) if PCP is settled early?

    Thanks

    Bim

  33. Hi Stuart,

    I’ve never taken up a PCP deal before since i have always been risk averse. I’ve bought cars I can afford with little or no finance. The deal I’m considering is for a land rover discovery retailing at £48k, however I get 20% discount which brings the price down to circa £39k. I have been offered GMFV of £25k in 3 years, so with a £4k deposit I will finance £10k. I planned to sell the car after 12months to buy another discovery, I expect to sell the discovery at the same price as I bought it, therefore the only thing I should be paying is the interest of the £10k finance over the 12 months.

    This all sounds too good to be true so I thought I’ll post this just to check if there’s anything which may catch me out.

    Thanks

    Jason

  34. stuart

    Hi Bim. Yes you can take the finance from the dealer and pay it off sooner. If you choose to do so, then it is best to do so immediately (within the first month) to minimise the fees an interest. However, what you can usually do is sign up for the finance to get the £2500 deposit contribution, then after you take delivery of the car you cancel the finance. You have 14 days to do this. Audi Finance will immediately invoice you for the amount borrowed, which you pay off since you already have the money. No fees, no interest; it’s your legal right to cancel the finance within 14 days. It will not affect your credit rating either.

  35. stuart

    Hi Jason. I’d be very cautious about taking a 3-year deal on this model and trying to sell after a year. The reason that Land Rover is offering 20% off the Discovery is because it is at the end of its life and about to be replaced by a new model. It will take a massive depreciation hit early on, and only get close to its GMFV by the 3-year mark (and it is a very strong GMFV offer under the circumstances). If you sell after a year, you will almost certainly have a lot of negative equity to clear.

    You are also calculating the interest incorrectly. You pay interest on the full value of the amount borrowed, which includes the £25K GMFV, so you are paying interest on £35K not £10K. This will hurt your 1-year settlement position even more, as you are basically repaying £35K-worth of interest up-front and then selling a car which is worth a lot less than your settlement.

    That’s why it sounds too good to be true…

  36. Hi stuart, thanks for the prompt reply. The point you make on the interest calculation was new information for me and it’s enough to put me off taking out the PCP since I think I can get a better deal using a personal loan instead and take ownership of the car in my name offering more flexibility when reselling.

    However the 20% discount I feel is still quote generous because the discovery replacement isn’t planned until late 2016 so im predicting strong resale values in march 2016.

  37. Thanks Stuart for the advice. Would you know if I loose my £2500 deposit contribution of I cancelled within 14 days?

    Regards

    Bimal

  38. stuart

    Hi Bimal. You shouldn’t lose the deposit contribution unless they have written a clause into the contract. Have a read of this article, which contains more information on deposit contributions.

  39. Thanks Stuart you’re a star! Should I ask for all of the terms and conditions? If so do you know which terms and conditions I need to ask for?

    Love this website, it’s brilliant!

  40. Hi,

    Due to expecting our first child we have just taken out pcp on a 62plate qashqui £219.00 pm over three years, putting in £1800 deposit I’m 1-2 months into the agreement. My husband has just come home in a 14 plate new shape qashqui which I love , why didn’t we consider a new one ! What sort of cost or penalties would I be looking at to settle my pcp early ??

    Thanks
    Diane

  41. stuart

    There should be a full set of terms and conditions as part of your agreement. You have the right to read these and take them away from the dealership before signing, regardless of what the dealer might try and tell you to the contrary.

  42. stuart

    Hi Diane. You will probably have to pay a fair chunk of money to get out of the car so soon into your agreement. The car’s rate of depreciation is much quicker than you are paying off early in the agreement (even though it’s a used car), so if you try and sell the car back to the same Nissan dealer you bought it from, you will get a very rude shock at what price they offer you. Best bet financially is to stick with what you’ve got for about two years and then change it. You can change it earlier, but it will probably cost you a fair bit of money and it’s likely you’ll have plenty of other expenses to come between now and then!

  43. Stuart, which is better? PCP or PCH

  44. im about to sign the document for PCH and at the same time thinking of changing to PCP.

  45. stuart

    Hi David. The decision as to which is better for you will depend on your circumstances and the specifics of each offer. Some brands push their PCP deals harder, others give the best deals on PCH. Have a read of this article which compares the two finance products.

  46. hi

    im interested in purchasing a used mercedes car for 38k with a 25k deposit but would like to know if its best to take out hp or pcp? i plan to pay off the debt in 6 months but what would work out better to avoid paying out to much interest. I have looked at taking a bank loan but as I have recently taken out a mortgage I don’t think the mortgage will allow me to borrow.

    what would you recommend? we are buying the car from a mercedes dealer.

  47. stuart

    Hi Tony. It is unlikely to make any significant difference to your overall cost if you are going to pay it all off within 6 months anyway. Usually the APR will be virtually the same for both HP and PCP. What you should do is take the finance over the shortest term possible – it might increase your interest rate slightly, but it will bring the Total Amount Payable down. The first 6 months of payments will be higher, but you will save money overall once you have settled everything.

  48. Hi Stuart

    So if i took hp there minimum term length is 2 years and if you pay off early its 3 months interest…I take it if i pay off in 6 months I will be making a huge saving than taken a 3 year term?

    Wouldn’t it be better to take out a 3 or 4 year term where the interest rate would be less so when I pay off the debt in 6 months the interest they calculate is what I fixed at the beginning of my term and would be much lower than taking out a 2 year term?

    Sorry but I have never taken finance options before and want to make sure that what ever I take I don’t pay too much interest as I am already losing money on buying a car I don’t want to be losing loads more on paying the loan because of interest paid.

  49. stuart

    The longer the term, the more interest you pay on the borrowing and the higher the Total Amount Payable, even if the rate is lower. Therefore after 6 months, you will have paid off less of that total. The Total Amount Payable is the number you need to look at in your situation. Again, if you are settling after 6 months then it really won’t make a lot of difference to the overall cost.

  50. Stuart – great site, if only more were this helpful! I would be interested in your opinion on the situation I am in. I am within the 14 day cancellation period on a PCP I have taken out on a used car and have realised I am probably better off paying the car with a loan (lower APR) – even if I stretch the loan repayments out longer than the PCP duration to maintain a cash-flow. On my finance agreement it has a figure for amount of credit and a figure for total charge for credit. The sum of these figures is obviously what I am about to start paying back monthly and in the final balloon payment. I was wondering if I cancel this agreement in the 14 day period what I would have to pay back – is it just the amount of credit or would I owe the charge for credit also? (The charge for credit is quite hefty so would affect the loan amount I would require).

  51. Hi Stuart so your saying since I’m paying back in 6 months time it wouldn’t matter what length I have? I was thinking if I take out the 3 year period the interest is less and fixed, mercedes say when paying off early you pay just 3 months of interest.

  52. stuart

    Hi Hamish. If you cancel the finance agreement within the 14-day cooling-off period, you will be immediately invoiced for the amount borrowed. The finance company cannot charge you any fees or interest when you do this, and it will not affect your credit rating. However, you will have a limited time to pay the finance company back, so you need to be approved and have been paid by the bank in very short order to make sure you pay the finance company off on time. For more info, have a read of this article.

  53. stuart

    You will pay a fee for settling early (the three months’ interest), but you save all the interest that you would otherwise pay over the remainder of the agreement. The main difference between taking out (for example) a 2-year HP and a 4-year HP is that you will have paid off more of the 2-year HP by the time you settle, so your total cost will be less. But as I have said, it won’t make a massive difference.

    The most important thing in your situation is being sure that you will settle after 6 months. Plenty of people have gone into an agreement with a similar idea and, for one reason or another, not settled early as planned so end up paying a lot more in total by the time they do eventually settle.

  54. Thanks Stuart. Do you know when the 14 day period starts – the date of me signing the finance agreement or the day I pick up the car?

  55. stuart

    As a rule, 14 days from when the contract is activated (ie – when the finance company pays the dealer for the car, usually the day of delivery or the day before). This is to stop finance companies sitting on the contract for a couple of weeks after you sign it, and not activating it until the cooling off period has expired. However, I would strongly advise acting as early as possible rather than waiting the full 14 days. If anything gets delayed or dragged out past the cooling off limit, you may lose the right to cancel without charge.

  56. Hi I’ve recently (3 months ago) purchased a Nissan juke on finance £223 over a 4 year period. Due to many circumstances I’m struggling to pay this along with insurance every month. I’ve heard there’s no way to take it back. Is this true?I have no money to pay a large amount for cancellation. Is there anything else I can do?

  57. stuart

    Hi Abby. Unfortunately there is no easy way out of it. The problem you have is that your settlement figure right now would be more than the new car price (because you have additional interest and fees which you have barely started to repay), but your car has already lost a large chunk of its new car value due to immediate depreciation thanks to VAT and other costs (see this article on depreciation for more details). So the only way you can get rid of the car is to pay out a large shortfall, which you have said you don’t have. Best bet is to contact the finance company and discuss your options with them. They may extend the loan period at a reduced payment or offer some other solutions, however fundamentally you are committed to keep paying back the money borrowed.

  58. Hi Stuart,

    Great help and advice on your site.

    I’m 14 months in to a 24 month PCP agreement, unfortunately my car has been written off by my insurer after an accident, which was my fault – no one else involved luckily. Where will I stand with the PCP agreement?

  59. stuart

    Hi Paul, sorry to hear about your accident. Unfortunately your accident does not alter your PCP situation, in that you still owe the finance company all the money as set out in the agreement. You will need to request a settlement figure from the finance company (if you are settling early, you will save on the interest you would have paid for the remainder of the term) and then hope that your insurance payout covers your settlement. If there is a shortfall then you will have to pay this yourself.

    Don’t be afraid to haggle with your insurance company over the payout figure as well. It’s a common tactic for them to try and low-ball you on the payout, then bully you into accepting it. Do your research as to what your car is really worth so you can hit back with valuations if necessary.

  60. Hi Stuart,
    I currently have an Audi S3 on a 4 year PCP deal. My mileage per year is 15k Miles on the agreement, however, at 12 months of owning the Car my mileage has exceeded this considerably (23k miles) and will continue to be around 23k miles per year for the remaining 36 months. My penalty for excess mileage is around 7 Pence per mile. Would I be better to start a new PCP deal (paying any negative equity) or wait it out further and be faced with the excess mileage charges?

    Kind regards,
    James

  61. stuart

    Hi James. You won’t be able to start another PCP on the same car, so you will need to work out whether it is worth settling your current PCP and part-exchanging your S3 on another car. It is likely that your current negative equity position is quite large, so you would probably have to shell out a large amount to get rid of your car. You should be able to call Audi Finance and get them to up your mileage allowance. This will put your monthly payments up, but will help reduce your negative equity over time.

  62. Thanks for your help Stuart. I managed to cancel my PCP and obtain the loan so have ended up happier with my finance arrangement.

  63. stuart

    Hi Hamish. Really glad to hear that it has worked out well for you. Enjoy your new car, have a great new year and feel free to tell everyone you know how great this website is ;)

  64. Hi Stuart,

    I have a Nissan Juke on PCP since May 2013. It is not big enough for my family needs so I am interested in changing the car. My husband has left so I do not have his income to help with the monthly repayments of £285 either.

    I have found a car I like for £10599 and they have offered me £9039 for the Juke. I have fully explained about the PCP I have and given them the settlement figure from RCI Finance. They are insitant that I only need to pay £1560 to collect the new car. Surely this can’t be right it seems too good to be true!!

    Please advise I have nobody to ask.

    Thank you.

  65. stuart

    Hi Rhiannon. The dealership should be able to provide you with a full breakdown of how they have arrived at their numbers. Based on what you have said, they are covering the Juke’s settlement amount (which you will have from RCI Finance) and there is no deposit on the new car.

    Check what your monthly payments are and how long the term is over. It may be that in order to reduce your deposit the dealer has extended the term. Or it could simply be that there is a good deal on that car.

  66. Hi Stuart.

    I just had a question about my pcp contract. I am 3 months into a 3 year pcp contract with mercedes. I was just wondering at the end of the pcp contract does the GMFV value need to be paid in full or can a new finance contract be started to pay off the GMFV value over a period of time if I cant afford to pay it in full.

    Thanks.

  67. stuart

    Hi Mike. Mercedes-Benz Finance does not allow you to re-finance the GMFV through them, which means that you have to go to your bank (or another bank/finance company) to pay off the GMFV to Mercedes-Benz. However, your monthly PCP payments include interest on the GMFV, so if you are borrowing money to pay off the GMFV then you are paying interest twice on that amount.

  68. Thanks for the reply. So if I can’t afford to pay the GMFV at the end of the contract then the other options be to return the car or to get another car on pcp?

  69. This is an excellent article and very informative.
    I am in the process of purchasing a new Audi A6 Avant and in order to benefit from the best price I am being ushered down the route of a PCP agreement.
    I have the cash to buy the car outright but the cash deal is £2,250 more than the PCP price.
    Obviously, I’d much prefer to pay the lower price.
    Can I avail of the PCP deal and settle it or does this incur a fine?
    I did ask the dealer but he said he was unable to comment on this.
    Many thanks in advance.

  70. stuart

    Hi Mike. Yes that’s right – you either give it back or part-exchange it on another car. The disadvantage of PCP financing is that it tends to push you into a cycle of continually changing your car and starting another PCP.

  71. stuart

    Hi John. Yes you can certainly do this; have a read of this article. As long as you settle the finance within 14 days, you will incur no fees or interest and still benefit from the deposit contribution.

  72. Thanks for your reply. If I decide to part exchange it for another car, can it be with any other car manufacturer?

  73. stuart

    Yes Mike, you can change it for any other brand of car. The dealer where you are buying your next car will settle the PCP on your behalf as part of the next deal.

  74. Hi Stuart,

    I found this article fantastic, thank you! :-)

    I wouldn’t mind asking some clarity on my PCP agreement that I have for my Mazda 2 (from a Mazda dealer). I am 30 months into a 42 month PCP, paying ~£140 p/month, with a GFMV of £3k, and the car was worth ~£9.5k. I paid a deposit of £3200 initially.

    What would be my options if I wanted to return the car now to Mazda? Can I just hand it back, or will I require to pay a settlement fee, I would imagine now that I’m over the 50%, in which case could do “a voluntary termination”, but by doing that, will it affect my credit standing?

    I hope this makes some sense!

    Thanks,
    Paul

  75. Hi. I have a pcp taken with Mercedes finance. Period was 4 years with annual mileage @ 10k with advise from the salesman knowing my actual mileage would be higher. After 3 years I have done 125k. The agreement states 0.09p penalty per mile over the annual 10k. I have had all services done by same Mercedes dealership, it’s condition is very good even with its milage. Can I give the car back now without paying the penalty? If not what is my best course of action?
    Many thanks Ian

  76. stuart

    Hi Paul. You should be able to voluntarily terminate the agreement and return the car, as you should have repaid over 50% of the total amount payable. It won’t affect your credit rating as it is your legal right (read the linked article for more info).

  77. stuart

    Hi Ian. If you knew the mileage of the agreement was far lower than you would actually be doing, why did you sign the agreement? If you are three years into a four-year agreement, you should have paid back enough to be able to voluntarily terminate the agreement and give back the car. Check your contract for the exact figures.

  78. Hi Stuart

    Very informative article. I have 7 more payments of £165.79 to make on my PCP agreement which will make 43 payments in total. The final payment will be £3920. If I settle now it will cost me £4799. My car is just over 3 years old with a mileage of 16400. My question is this, is it better for me to settle now using my savings and keep the car for a few years. Would it be better to wait until I’ve made the 43rd payment and then pay the final amount using my savings. Or would it be better to wait until the end of the agreement, give back the car and use my savings to get a good second hand one.

    Thanks for any advice.

  79. stuart

    Hi Leona. If you are going to keep this car, it won’t make a substantial difference whether you settle now or settle at the end of the contract. If you settle now you will pay slightly less overall, but it’s probably no more than a couple of hundred pounds. The main benefit of settling now would be peace of mind that it’s all done, if you have the funds available.

    If you like your current car, you are probably better off settling and keeping it rather than replacing it with a similar used car. If you were going to buy your current car as it is now from a dealership, it would cost you more than the settlement fee simply because you have to pay for the dealer’s costs and profits on top of the value of the car.

  80. Hi

    My partner has a three year vw up, we put a £3000.00 deposit down, but looking through the paper work we cannot find the GMFV on the finance information only the final ballon payment,

    How can we find out what the GMFV was three year ago as we have been asked if we want to upgrade by the garage, my concern is there no equity in the car. As the garage have asked us to put £300.00 deposit down with increased payments and over a longer time period.

  81. stuart

    Hi Peter. Assuming your parter has a PCP (Volkswagen Solutions), your GMFV is the balloon. It is normal at the end of a PCP agreement for you to not have any equity in the car (despite what car salespeople usually promise!). Usually the car’s value is similar to or slightly less than the GMFV/balloon, so you basically just give it back and start a new agreement based on whatever offers are in place at the time.

    It’s not unusual for a new agreement to be more expensive than for a similar car on a previous agreement. Manufacturers and dealers may have been doing deals on particular cars three years ago that they are not doing today, depending on supply and demand.

  82. Hi Stuart
    Bmw have offered me 520d m sport in white standard m sport features sat nav leather seats etc they offering 3k for my 320d that’s 06 plate and done 140k. They giving me 4 year deal with 25 mileage each year for monthly cost of 470. Is this a good deal or not. Thanks

  83. stuart

    Hi Raja. We can’t comment on whether any deal is any good or not, because there’s not enough information to analyse it, and it would quickly spiral out of control as everyone asks for advice on deals they’ve been offered.

    What you should do is speak to at least one other dealer and see what sort of quote you end up with from them. There shouldn’t be a great deal of difference, but they may offer you more (or less) for your current car, or they may have a perfect car for you in stock now that they are prepared to do a better deal on.

  84. Hi Stuart, im about to enter into an agreement on a ford fiesta i get ford discount because my dad works at Ford. The dealer keeps telling me that people with ford discount are better off to exchange the car every year and get a new one. Is this true? or is it better to hand the car back after the 24 months term and start a new agreement?

    Thanks,

    Luke

  85. stuart

    Hi Luke. The dealer would love you to change the car every year, but it’s unlikely to be the most cost-effective option for you. Get a quote on both 12 and 24 months and see what the difference is. It may be that there is not a huge difference, but a 24-month agreement should yield a significantly lower monthly payment.

    Also remember that most new agreements require you to put up a cash deposit, so if you take a 12-month agreement then you will be having to find another deposit for your next car within a year rather than after two years.

  86. Hi, I am thinking of getting a Scirocco on PCP with VW Solutions, their interest rate for the monthly payments I’m looking at is really high at 17/18% APR. I only plan on keeping the car for the duration of the PCP and hand it back at the end. Should the interest being this high really affect me as I do not plan to purchase the car fully. Cheers

  87. stuart

    Hi Dan. I am guessing that you are buying a used car? I can’t imagine that VW Finance would have an interest rate anywhere near that high on a new car.

    A PCP is a cashflow agreement, as you don’t intend to keep the car, but such a high interest rate is still relevant as it is pushing your monthly payments up significantly. I would have thought you could get finance at a far better rate – try another VW dealer or other finance companies like Santander or Black Horse.

  88. Hi, I have a 4 year PCP agreement on an Audi A6. I’m almost 2 years in and want a change. I contacted the dealer who has said I have about £4k negative equity. However the price they would give me fit the car seems lower than I thought it would be worth when I compare my car to others on private sale and Parkers guide. I think they are being over cautious or more likely want me to invest more.
    Given the competiavtive market of selling cars I’m think of speaking to a BMW dealer to see if they would give me more for my car and a good discount? Can another dealer from a different brand pay off my PCP agreement? Would they want to or be willing to? Thanks

  89. Morning Stuart….we have 2 PCP proposals in front of us…one from Mercedes (C220 SE Auto over 3 years) and one from Audi (A4 Black Edition plus over 4 years). Both have very similar deposits and monthly payments yet the residual value for the Merc is quoted at £17250 and the Audi £12500. The RV on the Merc appears to be very high at 53% of the original price and would lead to negative equity ? We would be looking to change in 2-3 years anyway….which is the best deal you think….we love BOTH cars so not too bothered, just want to make the right choice financially.

  90. stuart

    Hi Mighty. Two things: 1) your car is almost certainly worth less than you think; and 2) they probably are offering less than they could do, in case you say yes. This is called lowballing and almost every dealer will do it. You are under no obligation to accept it if you don’t want to. By all means shop around with other Audi dealers or BMW dealers; you may see a surprising variation in offers.

    Always take any prices/valuations you see online with a large pinch of salt. Private sale ads can tell you what sellers are asking, but they don’t tell you what they eventually sold for – it’s usually less than the asking price. And no-one in the industry uses Parkers. Dealers use CAP and Glass’s as a starting point and then make their judgments based on the condition and specific details of your car.

  91. stuart

    Hi Brian. Assuming that you are looking at new or very-nearly-new cars, the Mercedes will have a significantly higher residual value than the Audi. This is because the C-Class is a brand new model (launched middle of last year) and the Audi has been around since 2008, with a new A4 just around the corner. Within a few months, the A4 will be the ‘old model’ and its value will drop considerably. The C-Class will still be the ‘new model’ when you want to change it in 2-3 years’ time, so its value will be higher.

    The Audi should be carrying a hefty discount, so if the deposit and monthly payments are the same, you are hopefully being offered a fair chunk off the RRP (even allowing for the fact that they are covering a larger rate of depreciation).

    I always recommend that car buyers assume that they will have no equity at the end of the agreement, as that tends to be the case most of the time. Set your expectations low and if you do have any, then consider it a bonus.

    By the look of it, and assuming that neither car has any equity at the end, they’re going to cost about the same to own and run. I prefer the C-Class myself, but the Audi engine is definitely quieter and smoother. Both are certainly very good cars.

  92. Thanks Stuart. It will have to be a large pinch of salt as its circa 20% difference. Would another dealer clear the negative equity of my car and add it to the cost price of a new one? I’m think of a non Audi dealer.

  93. stuart

    Most finance companies won’t allow you to finance negative equity, especially on a PCP, as it is setting you up for big problems if you need/want to end the new agreement early (you would be even further behind than normal early on in the agreement), so you will need to pay off any negative equity separately to the new PCP.

    20% is not unusual. Given that a dealer will usually undervalue your car and hope you’ll say yes, and most people overvalue their own cars, it’s very common to find that sort of difference between what’s expected and what’s offered. By all means ask the dealer to show you the CAP and/or Glass’s values that they will be using to assess your car, and to justify any variation between that and what they are offering. A good dealer will happily show you how they have assessed your car’s value if they have nothing to hide.

  94. Hi Stuart,

    I currently have a Mercedes A class on finance (£270 a month) this deal is over 3 years and we have had the car only 10 months but it is now not right for our needs ; we are looking to purchase a Range Rover eqove – could you provide some advice on what we can do as we have only had the car 10 months

    Thanks

  95. stuart

    Hi Mercedes. I’m not sure what needs you may have where an Evoque will do a better job than an A-Class – they’re not really any bigger inside and will probably cost considerably more to run.

    You can certainly settle your finance agreement as explained in the article above, and I’m sure a Land Rover dealer will be happy to assist you, but it will probably cost you a bundle to get out of it before you can start all over again on an Evoque.

  96. Hi,
    I bought a fiat 500 on PCP in may 2013 and already was in negative equity with a previous car. The deal i have now is over 4 years but i either have a lump sum or need to re-finance the rest. Is there a way i can sell the car early?

    Thanka
    Jennifer

  97. stuart

    Hi Jennifer. Yes, you can sell the car early, but you will have to settle what you owe – and that is certainly going to be more than your car is worth, especially if they have allowed you to refinance your negative equity. So if you want to sell your car early, it is going to cost you a lot of money.

  98. Hi Stuart , I wonder if you can help me. I selected a car with a dealer a week ago and they didnt take a deposit they didnt seem to be chasing for it, they offered me a good deal though it was on a 64 plate. Since i have been contacted by them and they say that the car must be registered by end of January for the discounts to apply because we are not paying with credit and are paying with cash. They have also asked for all the money up front. Is this normal to request all the money up front? I thought I should just pay a deposit initially and pay in full when i pick it up? The other thing is if its registered on the 31st Jan and they keep telling me they dont have a delivery date surely I could be waiting for 3 months to get the car I cant imagine they will be in a hurry that will leave me with a 64 plate in March, is this normal? Thanks Luke

  99. stuart

    Hi Luke. I’d be refusing to pay them until the car arrives. It’s normal for them to expect full payment up to 48 hours before delivery, but not without a delivery date and not without the car. It shouldn’t matter how you’re paying for it, cash or credit.

  100. Hi
    I am 2 years into my finance and paid off over half my valuation for part exhange is 3000 and i owe 3660 i would have to pay 660 extra as thsts the diff. However i am a student and iw it possible instead of as someone said the dealership adds the pcp onto a new one can the existing loan of 660 be paid off in several months after part exhange done or do they expect the whole 660 the day the finance is paid off? Many thanks

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