One question often arises: can you change your car halfway through a PCP agreement? Here, we’ll explore the ins and outs of PCP car finance, how it works, and what options you have if you’re looking to switch cars mid-contract.
What is PCP car finance?
Personal Contract Purchase, or PCP, is a type of car finance agreement that enables you to drive a car by paying manageable monthly instalments.
Unlike other finance options, such as Hire Purchase (HP), PCP gives you three choices at the end of the agreement:
- Return the car: Hand the car back with no additional costs if it’s within agreed mileage and in good condition.
- Pay the balloon payment: Make a final lump sum (balloon payment) to keep the car outright.
- Trade-in or upgrade: Use any positive equity as a deposit towards a new PCP agreement on a different vehicle.
This flexibility is what makes PCP a favourite among drivers who like the option of switching to a newer model every few years without committing to outright ownership.
Monthly payments and balloon payments
One of the attractive aspects of PCP car finance is the structure of the payments. Monthly instalments are usually lower than they would be with an HP agreement because you’re not paying towards full ownership but rather for the vehicle’s depreciation over the contract period. The final balloon payment is based on the car’s Guaranteed Minimum Future Value (GMFV), an estimated value of the vehicle at the end of the term.
Can you change your car halfway through PCP?
Changing cars halfway through a PCP agreement is possible, although it may involve a few considerations. If you’re considering switching to a new car or upgrading, it’s crucial to understand how your current agreement could impact this process.
Understanding negative equity
When you take out a PCP agreement, the car’s depreciation may mean you owe more than the car’s current market value during the earlier stages of the contract. This situation is known as negative equity. As time progresses and you pay more towards the vehicle, the balance may come closer to its actual value, eventually creating positive equity.
If you’re halfway through the term and considering a new car, checking the vehicle’s current market value is essential. If your car’s value is less than what you owe on the finance, you’ll need to cover the difference. On the other hand, if you’ve reached a stage of positive equity, you could use that equity towards a new vehicle’s deposit.
Settling the PCP agreement early
One option to switch cars halfway through a PCP term is by settling the agreement early. This involves paying off the outstanding finance amount (known as the settlement figure) and then selling or part-exchanging the car. The settlement figure typically reduces over time as you make payments, making early settlement more feasible in the latter half of the term.
Some finance companies may charge an early settlement fee, so it’s worth reviewing your agreement to understand any associated costs. Settling early may allow you to start a new PCP agreement on a different vehicle, but it’s essential to calculate whether the cost justifies the switch.
How to check your options for changing cars mid-term
If you’re interested in switching cars, start by contacting your finance provider to obtain a settlement figure. From there, you can:
- Compare the car’s market value: Check the current market value of your vehicle using online valuation tools or through local dealerships. Understanding whether your car is in positive or negative equity can influence your decision.
- Discuss trade-in options with a dealer: Many dealerships offer trade-in services where you can use your current vehicle as part of a deposit on a new car. This may be a feasible option if you’re moving towards positive equity or if the dealer is offering incentives to switch.
- Consider part-exchange or refinancing: Some dealerships or lenders allow you to part-exchange a car even if it’s under finance. In this case, any positive equity can be applied to the new vehicle, while negative equity may either be absorbed into the new agreement or settled upfront.
Pros and cons of switching cars midway in a PCP agreement
Switching cars during a PCP contract can be tempting, especially if your needs have changed, or you’re drawn to a newer model. Here’s a quick overview of some benefits and challenges of this approach:
Pros
✅ Flexibility: PCP allows you to upgrade or switch cars without waiting for the end of the term.
✅ Access to newer models: If a new model with improved features or fuel efficiency is available, switching can let you take advantage of the latest technology.
✅ Adjust for lifestyle changes: If your circumstances change—perhaps you need a larger car for a growing family—switching cars could be beneficial.
Cons
❌ Potential negative equity: Exiting a PCP early may lead to additional costs if the car’s value hasn’t matched your outstanding balance.
❌ Early settlement fees: Some finance providers charge fees for settling the agreement ahead of time, impacting the overall cost.
❌ Complexity: Navigating early settlement, trade-in, or refinancing options can involve more administration and decision-making.
Closing notes
PCP car finance offers considerable flexibility for drivers who appreciate options at the end of a contract, but it also provides opportunities for changing vehicles halfway through if desired.
While switching cars mid-term is possible, it requires careful consideration of potential costs, negative equity, and any early settlement fees.
By understanding your vehicle’s current market value and comparing it to your outstanding balance, you can determine whether an upgrade or trade-in is financially feasible.
🚗 Further reading: Do you own the car on PCP car finance?
