Personal Contract Purchase finance agreements – or PCP for short – can be a great way to split the cost of buying a car into affordable monthly repayments.
It’s also a type of finance that gives you options; at the end of your loan term, you can choose to buy the car by paying the one-off balloon payment, hand it back to the lender, or use any available equity as a deposit in your next deal.
So far so good, right?
The other key thing to consider is that PCP deals typically last between two and four years.
While four years might not seem like that long (it’s the gap between World Cups, Olympic Games, and growing out your fringe, a lot can change in that time. Your employment status could change, you might expand your family, move to a job that requires a lot of long-distance driving, or simply get bored of driving the same set of wheels. These are all legitimate reasons why waiting until your PCP term comes to a natural end might not be the best option for you.
Unfortunately, PCP agreements are legally binding so, if you do want to end yours early, it’s not as easy as just walking away. That being said, you don’t necessarily have to stay locked into a deal that’s not right for you.
Read on to find out how to end your PCP agreement early – and what you should keep in mind before pulling the trigger.
How does PCP car finance work?
The deposit
Some PCP deals will ask you to put a deposit down upfront. The amount is up to you (and should be based on how much you can afford) but around 10% of the car’s purchase price is a typical deposit.
The monthly payments
Next, you’ll make a fixed monthly payment throughout the loan term. These payments will be calculated so they cover the difference between your new car’s current price and its estimated future value, usually called the Guaranteed Minimum Future Value or GMFV. As you don’t have to cover the full purchase amount, your payments can be lower than other finance options like Hire Purchase (HP).
The balloon payment
If you’ve fallen head over heels for your new car, you have the option to buy it and become its official owner at the end of the agreement. But first, you’ll need to pay the one-off lump sum known as the balloon payment. This is the amount outstanding on the loan and usually equivalent to the GMFV. If you can’t afford to pay it all in one go, don’t worry; refinancing loans are available.
One of the best things about PCP is that you don’t have to pay the balloon payment and become the car’s owner. Instead, you can choose to return the car to the lender and walk away or, if you have any equity available, trade it in as a deposit in a new deal.
How can I get out of my PCP finance agreement?
Whether your circumstances have changed, or you can’t afford to wait until your loan term ends, there are three ways to end a PCP finance agreement early.
Use your cooling-off period
If you’re still within the first 14 days of your car finance agreement, this means that you’re officially in your cooling-off period. Under the Consumer Credit Act 1974, you have the right to change your mind and end the agreement.
Settle the finance
You can request a settlement figure from your lender at any time. This is the amount you’ll need to pay to end your agreement and become the car’s legal owner. It will usually be made up of the remaining loan balance plus the final balloon payment, minus any future interest. It’ll also include any admin and early termination charges that might apply.
Opt for voluntary termination
Voluntary termination is a legal right, set out under Section 99 of the Consumer Credit Act 1974, that allows you to end your loan and hand the car back to your lender at any point. You just need to tell the lender you want to voluntarily terminate and return the car.
It’s important to note that you will need to have paid (or be prepared to) 50% of the total amount payable including the balloon payment. If you’ve already paid this, you can return the car without needing to pay any more money although extra charges might apply if the car is damaged beyond fair wear and tear.
More car finance guides
- How Can I Reduce My Monthly Car Payments?
- How Does Personal Contract Purchase (PCP) Finance Work?
- What is Voluntary Termination?
Can I cancel my car finance with more than half of the balance outstanding?
You have the right to cancel your PCP agreement through voluntary termination at any time. If you’ve made some payments towards the balance but still have more than 50% of the total amount payable remaining – including the final balloon payment - you will need to pay the difference.
You might find you need to pay the difference more when you have a PCP agreement than an HP as, due to that balloon payment, you won’t usually have paid back 50% of the total amount repayable when you’re halfway through the loan term.
Can voluntary termination impact my credit score?
Once your voluntary termination has been accepted and you’ve given the car back to the lender, it will show up on your credit report.
The good news is that it shouldn’t affect your score, especially if you haven’t missed any payments. A mutual end to an agreement with no defaults is usually viewed much more positively by future lenders and credit agencies than missed payments.
The only note of caution is if you’ve opted for voluntary termination more than once. As each instance will be listed on your credit report and ending a car finance agreement early can cost the lender money, they might be more reluctant to lend to you in the future if they think you’re likely to terminate.
How can I settle my PCP finance early?
Step one, you’ll need to get your settlement figure.
This is the amount you’ll need to pay to bring your finance to an end. It will usually be made up of any remaining loan payments including the one-off balloon payment, but you won’t have to pay any future interest (bonus!) An early repayment charge will likely apply, and you might need to cover additional admin fees too.
You can contact your lender at any time to request your settlement figure. Once you have it, the figure will be valid for at least 14 days. You can then pay the balance from your savings or refinance with a new loan.
What other options are available?
If you need to get out of your agreement but can’t afford to settle the finance or cover 50% of the total amount payable, there are two other options available:
Voluntary surrender
Voluntary surrender caters to people who haven’t yet paid 50% of the total amount payable on their finance agreement and can’t afford to make up the difference. It will negatively affect your credit score, which is why it’s typically only an option exercised by people who are really struggling with their finances and can’t afford to make any more repayments.
If you choose to voluntarily surrender your car, the lender will take it to sell at auction. If the final sale amount is more than the outstanding finance, you can simply walk away. However, if it falls short, you’ll still owe the remaining balance to the lender and will have to pay this off in instalments.
Refinance
If you’ve fallen in love with your new wheels but need a finance agreement that better suits your needs, refinancing could be an option. This is when you end your PCP deal early and replace it with a new one, usually with a different lender and different terms.
You could find a deal with a lower rate of interest (especially if you’ve been putting in the work to boost your credit score), or you can swap to an agreement with a longer loan term and lower monthly repayments. Keep in mind that if you do switch to a longer loan term, you’ll likely pay back more in interest overall.
See out your agreement
One of the best things about having PCP finance is that you have options at the end of your deal. If you can afford to keep making repayments until the end of your term, you can simply hand the car back and walk away. If you have positive equity in the car and you’re ready for a new set of wheels, you might even be able to use that surplus as a deposit in your next deal.
