Typical car finance contracts last 3-4 years, and a lot can change in that time. If that’s the case, chances are you might want an upgrade.
But, can you trade in a PCP car to another dealer before your old contract expires, and what can you do to make the most out of a new deal?
Let’s find out.
Trading in a car on a PCP is an uncommon practice.
Most people wait until the contract term ends and then swap their car for another vehicle. But, if you don’t want to wait, your PCP finance contract may have enough flexibility to allow for a cost-effective upgrade.
If you’re looking to finance a vehicle, you might want to read out guides on:
To make a PCP trade-in and change car dealers early, you must pay a settlement fee to the original dealership.
One way to reduce the costs you might have to pay is to GAP insurance which can cover any penalty fees for ending your lease agreement early.
If the current car’s worth exceeds the cost of the settlement fee, you can deposit any value that’s left from the old car onto the new one to reduce monthly repayments.
However, if the settlement fee costs more than the value of the old car, you’ll need to either pay off the outstanding debt or release equity on your car that you can add later on to your new agreement.
The downside to this method is that your monthly payments will increase.
If you want to get the most out of your PCP trade-in, you’ll have to increase your equity on the financed car.
Increasing your equity will make sure that the car is worth more than its GMFV (Guaranteed Minimum Future Value) – or how much the car would be worth at the end of the finance agreement, also known as a balloon payment – and you can use that excess to put towards a new car.
Dealers calculate the GMFV based on the mileage that you’re expected to rack up during your PCP agreement. The fewer miles you have, the bigger the difference between its actual value and its GMFV will be– which will leave you with more equity.
Some wear and tear is factored in the GMFV, but any damage to the car needs to be rectified because your dealer will charge you to cover the cost of the repairs when you return the car.
If the car has suffered a lot of wear and tear, it might be worth less than the GMFV. This wouldn’t be an issue if you’re returning your car to the same dealer, but if you switch dealers, you might end up with negative equity on your new deal.
The up-to-date service history is one way to potentially increase the value of a car. Deals always look into your service history to understand how well your car’s been maintained during your finance deal. Any gaps in your history can raise questions and decrease the car’s value.
You may be interested in: How much does it cost to run a car in the UK?
Negative equity means that your car’s value is lower than its GMFV.
For example, if your car’s value is £8000, but your balloon payment is £9000, it means you’ll have negative equity of £1,000.
If you choose to stick with the original lender, this won’t affect your deal since providers take on the risk and pay off any costs resulting from a drop in the car’s market value.
But if you trade the car to another dealer, you’ll be expected to cover the cost, either as a lump sum or split it into monthly installments. Failing to pay off the remaining debt could increase your negative equity by the end of the new contract.
If you’re short on money, you can consider getting a car loan with a guarantor.
Like every other deal, trading in a PCP car early to another dealer has its advantages and disadvantages.
Some of the advantages are:
Can you trade in a PCP car to another dealer? Although it’s not common for people to trade in a PCP car to another dealer before the end of the contract, it can be a cost-effective option if the vehicle is in good condition. You will still have to pay a settlement fee for cutting your contract short, but there are things you can do to increase your equity, get a better value, and find an affordable deal.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.