![]() ![]() Let’s look at the simple example graph above, which is based on borrowing £30,000 and having a GFV of £15,000 after three years. You owe thousands of pounds (all your remaining monthly payments, plus the balloon amount, minus some minor interest savings), which you probably don’t have in your bank account. What does that mean if I want to settle early? At any point before that time, you will have negative equity. In theory, the value of your car and the amount you owe the finance company should come back together again towards the end of the agreement. Even if you were able to sell your car (and legally it’s not yours to sell), the money you would get for it wouldn’t cover your debt. ![]() On a PCP, you spend almost all of your time in negative equity. Negative equity is what you get when you owe the finance company (the settlement, in red) more than what your car is worth (the value, in blue). ![]() This creates what is called negative equity (the grey area in the graph above it’s simply an example and the actual result will be affected by many factors). But because your monthly payment is fixed, this amount reduces in more or less a fixed amount each month, which is why the red line above is a straight line.įor the first year or more of your finance agreement, your car’s value is falling by more than you are repaying. Your monthly payments, of a few hundred pounds each month, gradually reduce your settlement figure (the red line above) over time. The “cost of purchase” (dealer’s costs and profit margin) push up the price you pay but they don’t add any value to the car, so once you drive away from the dealership your car is potentially worth thousands of pounds less than what you just paid for it. Read more: The Car Expert’s comprehensive guide to PCP car financeĭepreciation vs finance outstanding (click to enlarge) You will probably find you have a negative equity problem thanks to the car’s depreciation. If you want to settle up early and get rid of your car, it’s not so simple. However, that only applies at the end of the agreement, not during the agreement.Ī PCP is designed to work out neatly if you run it for the full term of the contract. That means you can give the car back at the end of the agreement, or part-exchange it with a car dealer on another vehicle, instead of paying off the balloon. The key to a PCP is that the finance company offers a guaranteed (minimum) future value to cover the balloon amount. In this example, that would probably mean monthly payments of £400-£500 and a balloon payment that’s probably somewhere between £10,000 and £15,000. To repay this debt, you will have three to four years of monthly payments and then a balloon payment. Until it is repaid in full, the car remains the property of the finance company. This is your debt, and it needs to be repaid. The finance company pays the dealer £28,000 and you get to drive home in your new car.Īt this point, you will owe the finance company £28,000 plus interest and fees – let’s call it a nice round £30,000. So if the car costs £30,000 and you put in £2,000 deposit, you will borrow the remaining £28,000. When you take out a PCP, you will usually put in an upfront payment (referred to as a deposit) and borrow the rest of the money required to pay for the car. However, the reality is that most people don’t have the thousands of pounds usually required to settle their finance and are looking for other options.Ī lot of the confusion about settling a PCP early comes from borrowers’ misunderstandings about how a PCP actually works in the first place. You can repay this at any time if you have the money available to do so. You have borrowed a large amount of money to buy a car, and that money needs to be repaid. ![]() There is a lot of confusion about ending a PCP agreement early, and a lot of that confusion comes about because people are looking for easy answers that simply don’t exist. 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? This is clear from the amount of traffic this site receives from UK car owners and car buyers every day. Most car dealerships are rubbish at explaining how various car finance products work. Make sure you also read our exclusive analysis of this payment holiday initiative to decide if it is right for you. Your finance company should offer you a three-month payment deferral on your car finance agreement. If you are concerned about your finances as a result of the coronavirus pandemic, there is help and guidance available. ![]()
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