Can I Part Exchange a Car on Finance?

What is a part exchange?

A part exchange is a common practice when buying new cars. Drivers give their existing vehicle to a car dealership to cover some of the purchase price for their next car. In most cases, the existing car counts as a car deposit, meaning you don’t need to save up more money and part with a lump sum to get a different car.

Let’s say your car has a current value of £4,000. You can use that as a deposit on a car worth a lot more, then pay the rest yourself or arrange a finance deal for the remaining amount. The latter is advantageous as it spreads the cost to give you more flexibility with what you can afford.

Part exchanging a car is beneficial because it allows you move to your next vehicle sooner, giving your budget a boost by leveraging the value of your car. It also takes away the hassle of selling your existing vehicle privately. Selling a car privately to fund your next car has the added complication of timing everything right and potentially being without a vehicle for a short period. This is all eliminated by part exchanging.

Is it possible for a financed car?

Things are a little more complicated with part exchanging a car on finance, as you may not own the car outright. Until you pay off car finance agreements, the car is usually still owned by your finance provider. That said, you will have paid some of the cost of your current finance agreement via the deposit and monthly instalments, which gives you some value in your current car.

If you part exchange your financed car, you’re trading it in for a new one, and putting any proceeds from the exchange towards the new purchase. Part exchange will typically be more convenient than a private sale, as the dealer will manage all the paperwork. It’s also a way of changing car without having to either pay off your car finance early or cancel it outright.

Where you’re eligible for part exchange, it can be a great way of finding a new set of wheels. However, not everyone is eligible for a part exchange – it’s contingent on what kind of car finance you have, how much you have paid off on your financed car and some other factors.

Who is eligible for part exchange?

You should be able to part exchange your car if you purchased a car on finance via either a Hire Purchase (HP) agreement, Personal Contract Purchase (PCP) agreement, or a personal loan. However, if you have financed your car via a PCH agreement, you won’t be eligible, as you are not the car’s legal owner at any point. Also known as leasing, personal contract hire (PCH) essentially means you are paying to use the car but not working towards owning it.

If you financed your car via a hire purchase or PCP deal, you can part exchange your car at the end of the finance agreement and put any value toward the new vehicle (or a deposit for the same).

You can also part exchange your car during your agreement – but whether or not this is a good idea depends on how much your car is worth, and how much you still owe. You’ll have to settle any outstanding balance before the part exchange can take place. This is done with a settlement figure or a negative equity finance agreement, which we discuss below.

How to part exchange a car on finance

There are a few considerations if you want to part exchange a car with a PCP agreement or HP finance agreement. Firstly, be aware that you’ll need the car’s logbook – known as its V5C – as well as any relevant paperwork, the vehicle manual, MOT and service documents.

Here are some additional things to factor into your part exchange deal…

Value vs outstanding finance

Before you part exchange a car, you need to know its value, as well as anything you still owe to your finance plan. The value of your car will be affected by how much you’ve cared for it, but it’s also dependent on the car’s mileage, service history, and specification.

This will then be weighed up against your outstanding finance – how much you have left to pay on your finance contract, including monthly payments and a balloon payment if you have PCP finance. The result of this calculation can give you either positive equity or negative equity, as described below.

Positive equity for a financed car

You may find you have a PCP deal that leaves you with a vehicle that’s worth more than your outstanding final payment. This is because you’re borrowing against the depreciation value of the car – not the purchase price. This puts you in a good position for a part exchange, as you’ll be in positive equity.

It’s best to go into a part exchange with positive equity – a car that’s of greater value than any outstanding finance. You can then put the positive equity toward the cost of a new vehicle. Remember that if you’re looking to purchase your next car by finance, the higher your deposit payment, the lower your monthly repayments will be.

So, positive equity essentially makes your new car finance agreement a little bit cheaper.

What about negative equity?

If the remaining balance on your finance is more than the car’s value, then you’re in negative equity. You may still be able to part exchange the car. This would require either you or the company you’re part exchanging the car with to pay a lump sum, rolling any debt into a negative equity finance agreement or paying a settlement figure.

Be aware that with a negative equity finance agreement, you will be paying off both your old car and new car, so you will likely notice a serious increase to your monthly repayments. Interest rates will also be higher, and you’re at higher risk of going into further negative equity.

Getting a settlement figure

To part exchange a car on finance with negative equity, you may need to get a settlement figure from your lender. This is where they’ll confirm any outstanding finance and positive or negative equity, which is used to calculate a settlement figure (or settlement amount) before you can part exchange your current car.

The settlement figure can sometimes include a final balloon payment and there may also be an early termination fee for your car finance agreement.

Talk to My Car Credit

If you’ve got questions about whether a part exchange is for you, contact My Car Credit today. We can address any concerns you may have and help you establish your car finance eligibility to part exchange a car. If you have an existing agreement, we can advise on the next steps to take with your finance company, before comparing deals from multiple lenders to part exhange a car and move to a new car finance deal.