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 Stuart

    We have an PCP agreement with a dealer.

    Ideally I want to change car, but not with the same dealer.

    The new dealer says my car is worth less than what is owed…

    my current deal says its worth what is owed.

    So ideally I want to give the car back at no cost

    Then start a fresh else where….

    Current dealer says I cannot just hand the car back…..is this true? (even though he say its worth what is owed)

    Can I VT with the finance company

    What would be you advice please?

    Your help with be appreciated.

  2. Stuart Masson

    Hi Darren. You can only hand your car back to the finance company and claim the GFV at the end of the term. If you are trying to change the car before that time, the GFV is not valid. You have to sell the car and pay off whatever you owe.

    If you have repaid 50% of your Total Amount Payable (including the balloon/GFV amount), you can voluntarily terminate the finance agreement.

  3. Hi Stuart,
    I have a fiat 500 on PCP. It was the 3rd one I have had this way, always taking the dealers upgrade at 2 years as I was happy with the car and system.
    However my circumstances have changed.
    I now have a job where I have a company car, so have barely driven my Fiat this year, but figured it wasn’t worth trying to break the contract.
    I am now in the position where my company car is changing to a car allowance. So I need to have a car that is suitable for business use, so needs to be good for the motorway and present a better image than my mint green Fiat.
    I still have 2 years left on the PCP. My question is really, will a different brand such as Audio or BMW do the same thing as Fiat do with their ‘upgrade’ / change to new deal?
    My only other option will be to take out a separate lease, which seems pointless ?
    Keeping the Fiat for business use is not an option.
    What would be your best advice?

  4. Stuart Masson

    Hi Kate. You will need to sell the Fiat and pay off your finance settlement. It will probably be expensive, because you are still likely to have significant negative equity. Whether you get a better price as a part-exchange on an Audi/BMW or by selling it privately is hard to say, but there’s not likely to be any cheap way out of it.

  5. If you have insurance get someone to write it off for you ;)

  6. Hi Stuart, I’m currently 4 months away from the end of my PCP agreement. Would a new dealership accept a trade in and are there likely to be any financial repercussions?
    Also it may be an obvious question but are there any major advantages to getting a car loan as opposed to a new pcp agreement?
    Thanks!
    Stacey

  7. Stuart Masson

    Hi Stacey. If you trade your car in at another dealership, they will assess its value and you will need to provide your current settlement figure. If the valuation is more than the settlement, they pay off your current finance company and you can use whatever’s left towards your next car. If the valuation does not cover the settlement (which is called negative equity), you would need to pay for the shortfall.

    The main advantage of a personal loan (car loan) over a PCP is that the APR is usually lower – although the monthly payments are usually higher as you are paying off the whole loan with no balloon. If you can afford the monthly payments, you have much more flexibility and better options during the agreement on a personal loan (or HP) compared to a PCP.

  8. Hi Stuart. I am currently 10 months off the end of a three year pcp lease on a 2014 corsa which I would usually hand back in and then find a new deal. However, my circumstances have now changed and im looking at getting a mortgage. However due to my pcp my affordability is not very good. I am looking for some advice on my next move. The current settlement figure as we speak is £7000 but think the car is worth £5000. I need a car for work so would it be worth just huying the car out right as I’ve already paid nearly £5000 for it. Or do I pay my negative equity of £2000 then walk away and try find a cheaper car?

    Thanks for help

    Vicky

  9. Hi

    One month ago I got a pcp deal for 21k on a nice vignale mondeo, love the car but like an idiot I didn’t test drive it first (after having had one before thought it was ok). The nice defined seats kill my back as I suffer from lower back degeneration due to the sport winged seats which lock you in one position. Now I realise this is my mistake and I will have to pay for it but the figure they gave added 3k on for interest to 24k and the trade in is 19k… will they charge the full amount or does it work like a loan and I’ll pay a penalty of a few months plus the original 21k?

    Thanks

    Terry

  10. Stuart Masson

    Hi Vicky. We can’t provide specific advice about what you should or should not do (we’re not financial or legal advisors). All we can do is explain how the processes work and what you need to be aware of so that you can make an informed decision.

    Obviously if you have the cash to settle the finance now, your monthly commitments will disappear – which helps your affordability position on a mortgage – but means you have £7,000 less to put towards your deposit. If you sell the car and pay off the negative equity, you will still have to find a new car. That probably means another deposit and then another ongoing monthly commitment. So you will probably spend less than £7,000 cash up front but still have a monthly outgoing.

  11. Stuart Masson

    Hi Terry. You are correct – if you settle the finance now, you will only pay interest on the time you have had the debt. As you estimated, it will be equivalent to a few months’ payments over and above the original borrowing.

  12. Thank you

  13. Hi Stuart,

    Just a bit of advice.

    I entered into a PCP agreement with Audi at the end of November 2016 for an Audi A4 (12 Plate). Payments are roughly £250pm with a final payment of roughly £8,500.

    Since then, I have had a considerable downturn in income due to change of career. It has not got to the stage where I am likely to miss payments, but it means my own free spending is now extremely limited.

    I am willing to listen to any options you think I may have? I hate the fact I may have to give up the car, as it really is fantastic and I love driving, so it’s not my ideal situation, but one needs to eat!!

    Thanks a lot,
    Kevin

  14. Stuart Masson

    Hi Kevin. First step would be to see a financial advisor so you can set out all of your incomes and expenses for them to make a proper recommendation.
    In terms of your PCP: if you really think that you won’t be able to afford the payments, your best bet is to get in touch with the finance company ASAP and see if they are prepared to accommodate any changes to the payment schedule (which they probably won’t). If not, you will probably need to sell the car and then pay off any additional negative equity (which could be quite a lot).
    It may be that you can then get a loan to pay off the negative equity at a reasonably low APR that means your monthly payments are significantly reduced and you can get your finances in order. But as I said, you will need to speak to a financial advisor for a proper recommendation of the best way for you to proceed.

  15. Hi There Stuart. thanks for great website. few questions if I may

    23k car, 8200 deposit and 14,500 remaining, 9925 GMFV and the difference at 189 pm over 36 months
    My question are:

    1 – Can you clear the difference between the GMV and the balance outstanding asap leaving only the GMFV to pay on the 37th month?
    2 – failing that could you overpay on the payments monthly like you would a mortgage thus reducing the interest if you were repaying off the principle hence the term would also reduce?
    3 – Is PCP for the financially inept?

  16. Stuart Masson

    Hi Niall.
    1) Depends on the finance company, but usually yes. You will also save on interest, as you have paid back 36 months’ worth of payments early.
    2) Depends on the finance company. Usually any overpayments will be used to reduce the future monthly instalments (eg – from £189 to £160, to £140, etc.), rather than reducing the term. The GMFV is calculated as the car’s expected value after three years.
    3) Not necessarily, although it is allowing the financially inept to access a lot of money that they will never repay. There is concern that this is not a sensible or sustainable state of affairs.

  17. I am in the second year of my 3-year PCP contract with Seat. I am planning to change into a bigger car at the end of the contract next year. Can I bring my car to a different dealer like Ford, Mazda or Hyundai and let their finance company pay the balloon from Seat just before the third year is up? Or do I have to talk to the Seat dealership?

  18. Stuart Masson

    Hi Clarissa. Yes, you can take your car anywhere. Your finance agreement is with the finance company (probably SEAT Finance, which is part of Volkswagen Bank), and has nothing to do with the dealership. If you go to a Ford or Mazda or Hyundai or any other dealership, they will settle the finance as part of the new vehicle contract.

  19. Hi
    Can you help please..

    I bought a Hyundai i20 on PCP in Sept 15 with an annual mileage of 8000 miles. I currently pay 189 £ and a final fee of 4000 £. This was a 4 year PCP. 1 year 9 months down the line I have done just 5000 miles and was wishing to close this PCP and move on to a merc / bmw. Can I make an earlier exit as Merc/BMW are happy to settle the remaining with Hyundai directly or will I need to settle 189£xPending Payments + Final Cost before I can exit ?

    Thanks

  20. Thank you. I always had it in my mind that I have to get a car from the same dealership even if I don’t like their car range anymore. I thought I was stuck with another SEAT. Thanks for the information.

  21. Stuart Masson

    Plenty of dealers will try to give you that impression…

  22. Hi – Are there any disadvantages to settling a PCP deal early if you have the spare cash? I’m 30 months into a 48 month deal. I’ve got the settlement value for the car, checked it against the market value on Webuyanycar and I’m in surplus. I therefore figure by paying it off I’ll be saving the interest for the remaining 18 months. Am I missing something?

  23. Stuart Masson

    Yes, you can settle at any time. Your current finance company can provide you with a current settlement figure, which will be less than the remaining payments + final payment because there will be a reduction in interest.

    When you part-exchange the car, the dealer who buys your car will settle the finance with your finance provider. If the settlement figure is more than the car is worth (which is likely this early into the contract), you will have to pay any difference to the dealer.

  24. Stuart Masson

    Hi Adam. If you have the cash handy then you can absolutely settle the finance early. You’ll save on 18 months’ worth of interest compared to continuing to pay it off at the normal rate.

  25. Hi Stuart

    I am 24 months into my 48 month PCP with Audi and am in negative equity of around £3,500 as there is £17,000 left to pay and the car is valued at £13,500. Do i keep my car for longer and change it with Audi at the 3 or 4 year mark, but I will prob still have negative equity, or do I get a low-interest rate loan (5.3%) with Zopa to pay the £3,500 and then use the value of the car (£13,500) as a deposit on a new one?The car I want is the same age as the car I have now, but is a better model, and is around £19,920, but is £22,988 inc. interest over 36 months at 10.9% apr. Am i correct in saying that it will be £22,988 minus the £13,500 deposit (part x from old car) leaves just £9,488 to spread over 36 months, which equates to £263.55 a month (less than what I pay now), and I will therefore have positive equity after 2 or 3 years to get another car as they estimate it will be worth £8,773 in 36 months. Another thought….I could have a final payment fee of £3,000, leaving £6,488 to spread over 36 months (£180.22 per month), and then I would be able to afford the Zopa loan for the neg equity payment on my current car. Does this sound correct? It seems too good to be true for me! I’d be in a better position than I am now.I don’t know which would be more beneficial to me for saving money in the long run?

  26. Stuart Masson

    Hi Roxanne. We can’t advise you on what you should or shouldn’t do; only explain how the finance products work so you can make an informed decision that suits your needs.

    You are right about one thing – it is too good to be true. Your car is worth £13,500 but you owe £17,000 – therefore you have no deposit and you need to find £3,500 to get rid of your current car. Your calculations and assumptions are way off. Have a read of our article on how a PCP works.

  27. Hi Stuart,

    I am within the last 90 days of my agreement with Vauxhall, I have exceeded the mileage on the agreement and understand I would be liable to pay for this extra mileage.

    If I keep the car and finance it would this mean I wouldn’t be required to pay the charge?

    Also if I decide I do not wish to keep the car can I do this any time during the 90 day period or only at the end?

    Thanks,
    James

  28. Stuart Masson

    Hi James. The excess mileage penalty only applies if you are giving the car back and claiming the GMFV. If you are going to pay out the balloon and keep the car, the mileage doesn’t matter.

    There will be an earliest date when you can return the car to claim the GMFV; you would need to speak to the finance company to find out when that is (probably once you have made your final monthly instalment).

  29. Hi Stuart….I have 7 months left on my PCP contract with Nissan, how do I go about ending my contract with them early. I am well below the mileage that Nissan have set out and the car is in excellent condition. Many thanks.

  30. Stuart Masson

    You will need to contact the finance company, who will provide you with a current settlement figure (usually valid for 30 days or until the next monthly payment goes out). Once you pay that off, the car’s yours.

  31. Hi Stuart, i have been reading your articles and have found them massively useful. i currently have a PCP deal with Mazda and paid a fairly sizeable deposit and a mileage limit of 12,500. The car is now 2 years old and due to changes in circumstances, the car has only done circa 7,000 miles and will probably be substantially less than the 43,750 miles when we return the car after the 18 months. I spoke briefly to the dealer last week when it was in for its second service and he said the best option is to continue paying as we are and use the equity that i am building up in the car by doing such low miles. Is it possible that when the agreement ends and the miles are still much lower than originally anticipated, is the GMFV all i owe to the finance company if i wanted to buy the car, despite the fact the value may well be much more due to low miles? Also what would your view be on the best way to proceed….

  32. Stuart Masson

    If you want to settle the outstanding finance, you can do that at any time. If you wait until the end of the agreement, the final payment is equal to the GMFV. The car’s market value does not affect this amount, as you are simply paying what you still owe on the original loan. If you want to settle it now, you will save on interest as you are paying it off early, but obviously the settlement figure will be higher as you haven’t paid as much off.

    Always be wary of any promises or expectations from salespeople regarding equity. Regardless of your low mileage, you may still find that the car is worth no more (or possibly even less) than the GMFV/balloon at the end of the agreement. It is definitely more likely that you will have some equity if you are significantly under your mileage limit, but it’s not a guarantee. Over the last few years, finance companies appear to have been increasing the final GMFV figures across the board (in order to bring monthly payments down), so customers are finding that they have less equity than they had on previous PCPs, or no equity at all.

  33. Hi stuart,

    I have a BMW 116D M Sport £1000 deposit £293pm 36-month deal with a 16k mileage PCP agreement and the finance is with motonovo (£8300 balloon payment at the end) car price at the time was £18000. The car was at 10,400 miles at purchase. A year and 2 months in I have done 20,600 miles. Based on my new job I think that i will be doing a similar amount of miles. This is my first PCP deal and I wanted to know, If I am thinking to upgrade my car to a BMW 118d or 120 (bigger engine) can I do that now, or shall I wait one more year, or is it best to see the car through until the end? And if I am allowed to part exchange my car early, how does it work in terms of settlement fee and remaining payments?. Let’s assume this will be for a new loan with MotoNovo again.

    Thanks, Alfred.

  34. Hi
    I’ve just signed an agreement on PCP and I’m due to pick the car up tomorrow the salesman gave me so much information I couldn’t take it all in, can I get out of this agreement and just pay for the car.
    I spoke to the salesman today who told me they had already got the money from the finance company but I could pay 4 months on PCP then pay for the car, why would I have to wait 4 months?
    Isn’t there a cooling off period where I can change my mind?
    If I had to stay 4 months how much would I have to pay? The total cost was 11.800.
    Thanks Jackie

  35. Stuart Masson

    Hi Alfred. You can change your car at any time, but you will have to settle the existing finance agreement (usually done as part of a part-exchange). As a rule, the earlier you want to end your contract, the more expensive it will be to change your car.
    Right now, you will probably have a lot of negative equity in your agreement. If you keep the car for longer, this should decrease. It’s up to you to decide how much you are prepared to spend to change your car for one with a slightly more powerful engine. It’s probably never going to be good value, but it depends how much you want it.

  36. Stuart Masson

    Hi Jackie. You can withdraw from the finance agreement within 14 days at no cost. The salesman won’t want you to do that (he won’t get his commission for selling the finance), which is why he is lying to you about having to keep the car for four months.
    If you withdraw from the finance agreement, the finance company will simply invoice you for whatever you borrowed. Usually you will have 28 days to pay this.

  37. I have a bike on pcp at the time of getting it I was told how great it was and if you ever can’t afford it you bring the bike back and that’s that. Reading this I know know that this was wrong.

    Recently my partner left and I have been thinking of giving up the bike as money is really tight (3 children one wage) but looking at this is may be not the best idea.

  38. Stuart Masson

    Depending on how long you’ve had the bike and how much you’ve paid off, you may be able to voluntarily terminate the contract. You have to have repaid 50% of the total amount payable.

    If not, you will be liable for any negative equity if you give the bike back to the finance company. What that means is that they will sell the bike at a trade auction, and then come after you for any shortfall on what you still owe. So if you still owe £10K, but hand the bike back and they sell it for £6K, they’ll chase you for the outstanding £4K (plus costs).

  39. Hi

    Our current PCP runs out in the next couple of months, the final payment is due on 29th September. However our new car from a different manufacturer will be ready at the start of September. What is the most economical way of getting rid of the old car? We have asked about returning the car early and been told we have to make the final payment before the car can be collected, this doesnt sound correct, is it?

  40. Stuart Masson

    Hi James. You should be able to return your current car to the finance company any time after the final monthly payment has been made. They may be happy for you to make your final payment(s) earlier so you can hand it back earlier. Alternatively, you can hold off on taking delivery of your new car until later in the month.

  41. Hi

    i have a year and a half left on my pcp contract, and i can really no longer keep the car because of my current situation, (need a higher car as no longer can get in/out of my current car as it is too low) maybe sounding a bit silly here but is there any way i can get out of the contract without paying anymore or as little as possible.

  42. Stuart Masson

    The only possibility is voluntary termination, depending on how much you have already paid off. But there is no right to exit the contract because the car is no longer suitable.

  43. Hi, can you tell me if you VT a PCP deal under the 50% rule, are you legally obliged to pay the excess?

  44. Sorry, I meant excess milage.

  45. Stuart Masson

    Hi Max. It’s an area of dispute. Majority opinion seems to be that the finance company cannot enforce excess mileage charges when you VT, but it’s not unanimous and they will usually try. For more information, have a read of our article about voluntary termination.

What are your thoughts? Let us know below.

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