Pcp finance how does it work

Once you've made the optional final payment - provided the deposit and all of the monthly payments have already been paid - you will become the owner. Typically this means taking out a Hire Purchase contract. As this would be Hire Purchase - rather than PCP - there is no large optional final payment needed at this stage - you simply make any deposit, followed by all of the monthly payments and once these are complete, the car is yours. If you intend to own a car from the start, you'll end up paying less interest overall with Hire Purchase than PCP provided the contract terms are the same , as you're paying off the balance faster.

You also won't face a large final payment that will add more interest to the bill if you go on to refinance it at the end of the contract. With that in mind, if you know you want to own the car and can afford the higher monthly payments with Hire Purchase, considering taking out a Hire Purchase contract to begin with.

By trading in your car at the end of a PCP agreement, you can ensure a seamless transition from one car to another. Any good car retailer will be able to take your existing car, settle the finance on your behalf and set up a new finance arrangement to avoid any disruption. Any good car retailer should be able to settle the finance on your behalf and arrange another finance agreement for your next model. However, instead of handing over the money to you, the company will settle the finance on your behalf by making the optional final payment to the lender.

Any surplus is then put towards a new car - where it can go towards the deposit on a new finance agreement, reducing the monthly payments - or you can choose for it to be paid directly into your bank account. In this case, trading your car in is a bad move.

If no one will buy your car for the value of the optional final payment, then you would have to pay the difference between what you could sell the car for and the remaining finance balance, to ensure that the lender is paid enough to settle the agreement.

Instead of doing this, you're better off by simply returning the car to the lender as you'll have nothing further to pay, provided the car's within the pre-agreed mileage limit and in good condition. The low value of the vehicle is then their problem. BuyaCar team Oct 13, Which type of car finance is best? Search all car deals with finance. Returning a car What happens Potential charges Avoiding charges Fair wear and tear Disputing charges.

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Deposit and delivery. Monthly payments. Paintwork and bumpers Some small chips are acceptable No more than two dents per panel - up to 10mm in diameter Some scratches and scrapes up to 25mm are acceptable, if not down to primer or bare metal.

You can usually trade the car in with a different seller or manufacturer at the end of your PCP deal. They will ensure that the finance is settled, and you will be able to use any equity in the trade-in car as a deposit. They may even value the car more highly, giving you a bigger deposit for your next vehicle. For the best chance of this happening, it's worth keeping the car in the best condition you can and sticking to your mileage limit.

Whether you want a different car or are looking to reduce your monthly payments, you can end your contract early by requesting a settlement fee from the finance company. Once this fee is paid, you should owe nothing more to the lender.

If you have the cash, you can simply pay it off and you'll own the car. That's not an option for many people, so it is possible to sell or part-exchange your PCP car with the agreement of your lender, who remains the owner of the car until the agreement is settled.

This is normally arranged through a car retailer. If you are near the end of the agreement, then your vehicle may be worth more than the settlement fee. In this case, most of the proceeds of the sale or part exchange will go to your lender. The remainder of the money will either come to you or be put towards your next car.

Should your vehicle be worth less than the settlement fee, then you'll need to pay the difference between the car's value and the amount owed to the lender. This can be done through your own funds if you have them.

If you are part-exchanging the vehicle for another one, however, then you may be able to take out a negative equity loan. This will cover the cost of the new car, as well as the remainder of the settlement fee, which you'll repay in monthly instalments.

If you're struggling to make your monthly payments, other options are available. These differ from lender to lender, so it's worthwhile checking with them to see what they offer. In the case of cars that hold their value extremely well, you may not get to this stage before the end of the contract.

You can also repay your PCP agreement early. One of the biggest benefits of a PCP agreement is that it offers total protection against a sudden and unexpected drop in car values. Once you've made all of your monthly payments, then you can just hand the car back with nothing more to pay, even if it's worth thousands of pounds less than the pre-agreed optional final payment. However, an unexpectedly low valuation will limit your options at the end of a PCP agreement.

If the car is worth less than the optional final payment, then you won't be able to trade it in; you'll need to find the money for a deposit towards another car elsewhere, or opt for a no-deposit agreement and face higher monthly payments. Buying the car also wouldn't make sense in this scenario as you'd have to make the optional final payment to buy it, and this amount would be more than the car is worth.

In this situation, you'd be better off handing the car back and buying a similar model that's for sale for a lower price. Search all car deals. One of the conditions of taking out a PCP agreement is usually that the car is covered by fully comprehensive insurance. This would ensure that any repairs are paid for. If the car is written off, then the insurance company would normally pay out for the value of the car at the time. This would go to the finance company, which is the owner of the vehicle during the PCP term.

However, if the car has lost a lot of value soon after you bought it - which is typically the case with new vehicles - then it's likely to be worth less than the amount that you owe to the finance company.

You would have to make this difference up, so you can take out guaranteed asset protection GAP insurance to pay for this. If your car is less than a year old, then it may benefit from a brand new replacement cover, which is often included in insurance policies.

And a new PCP plan. PCPs are effectively a way of trying to ensure that you will come back and buy another car from the same dealer or manufacturer. The balloon payments can also come as a nasty sting in the tail for many. Anecdotally, credit unions report that members are taking out loans in order to pay off the PCP balloon payment. Perhaps it would have been easier to just get a credit union car loan in the first place?

A car loan is far more clear-cut than PCP finance. Applying for a car loan is a straightforward transaction where you borrow money from your local credit union if you want the most affordable and flexible loan to pay for the car.

You own the car immediately. You can drive the car as much as you like. And you can sell the car on at any time you want. If you get a car loan before buying the car, you are effectively a cash buyer and you may even be in a position to negotiate a better deal. So both forms of finance will appear on your credit history. If you do want to apply for a car loan from your local credit union, you must first become a member.

You can read all about it here. You can also inform yourself of the benefits of a credit union loan if you want more reasons to be convinced.