Settling PCP finance early
Have you got a car on PCP finance? 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 the PCP agreement early. Much of that confusion comes as people are looking for easy answers that are difficult to find. In fact, it is quite simple. You have borrowed a large amount of money to buy a car, and that money needs to be repaid.
You can repay it at any time if you have the funds available to do so. However, the reality is that most people do not usually have thousands of pounds needed to organise their finances and are on the lookout for other options.
How does PCP work?
There is often a lot of confusion regarding how to quickly dispose of a PCP. This often comes from borrowers' misconceptions about how PCP actually works in the first place.
When you take out a PCP, you usually put in advance payment (referred to as a deposit). You then borrow the remaining funds needed to pay for the car. So, if the car costs £30,000 and you deposit £2,000, you will borrow the remaining £28,000. The finance company pays the dealer £28,000 and you get to drive home in your new car.
At this point, you will pay the finance company £28,000 plus interest and fees. Let's, for argument's sake call it a nice round £30,000. This is your debt, and it has to be repaid. The finance company remains the owner of your car until you have fully repaid them.
A PCP works neatly if you run it for the entire duration of the contract. If you want to settle down quickly and get rid of your car, it is not so easy. You will probably find that you have a negative equity problem for the depreciation of the car.
What are depreciation and negative equity?
From the moment you drive your new (or used) car, it starts losing value. This is called depreciation. The car loses value more quickly because the price you pay for a car from a dealer includes the cost of the car. However, it also includes the dealer's cost and margin of profit. Additionally, the cost contains a large dose of VAT if this is a new car. Over time, the rate of depreciation starts to slow.
Your monthly payment of a few hundred pounds every month gradually reduces your settlement figures over time. However, your monthly payment is fixed, so the amount becomes more or less a fixed amount every month too.
Negative equity is what you get when the finance company (settlement in red) exceeds the price of your car. On a PCP, you spend almost all of your time in negative equity. Even if you were able to sell your car, the money you would get for it would not cover your debt. Remember, though, legally the car is not yours to sell.
In theory, the value of your car and the amount you owe to the finance company should be returned together at the end of the agreement. At any point before that time, you will have negative equity.
What about voluntary termination?
Each PCP agreement has a clause outlining your termination rights. This gives you the right to return the car when you have paid half of the total amount due.
However, you will probably only reach the point where you can give the car back a few months before the end of the agreement. This is due to the common PCP structure: low deposit, low monthly payment and a large amount borrowed.
You can voluntarily terminate your agreement at any time. However, if you have not reached the 50% point, you will have to pay the difference. For most car owners with PCPs, this is still a negative equity position. Therefore, it is actually no better than selling the car with the permission of the finance company and disposing of the entire amount.
Should I dispose of PCP early or keep it till the end?
A PCP agreement is determined to be financially optimal to run all the way to the end of the agreement. The reality is that most times, you will have to pay a substantial amount of negative equity to settle a PCP early.
Whether or not it is worth paying to dispose of finances depends on how important your car needs to be to replace or get rid of it.
Circumstances change. The cost of paying to get rid of the car can now 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. In this case, the cost of changing may be worth it for you.
If you're looking for a new PCP deal, speak to one of the team today - https://www.spencerscarsales.co.uk/used/cars/