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    How to part exchange a car on finance – the ultimate guide

    If you have a car on finance that you’re thinking about selling, you have a number of options open to you.

    A great option, if we say so ourselves, is to sell your financed car the Motorway way! Enjoy a free, instant valuation and 5000+ verified dealers competing to buy your vehicle.

    Another popular option is part exchanging. This is where you use the value of your current car to offset the cost of the vehicle you want to buy. 

    Read on to find out what happens when you part exchange a car on finance:

    What do we mean by ‘car financing’?

    can you part exchange a car on finance
    Financed cars can usually be traded in at the end of the contract, or after a certain number of payments have been made.

    For many, financing is the most suitable way to buy a car. Paying monthly instalments rather than purchasing a car upfront can be much more financially sustainable, especially if you only use the car for a few years. 

    Most financing agreements are based on the proviso that the deposit and monthly payments go towards the equity purchase of the car – like a mortgage. 

    However, ‘leasing’ a car works like renting a property. The monthly payments are for using the car, but don’t ever contribute to ownership. When we talk about ‘financing’ in this guide, we mean Personal Contract Purchase (PCP) agreements and Hire Purchase (HP) agreements. With 80% of new cars on the road bought through PCP financing, it’s vital to find out what your options are, once you’re ready for a new car. This could mean choosing between an outright purchase, a part exchange against your next car, or simply walking away once your contract is fulfilled.

    Are you allowed to part exchange a car on finance?

    Not all finance models are the same. However, trading in your car is widespread and is offered with two major financing for ownership models:

    👍 PCP agreements consider the driver the owner from the outset of the contract. HP agreements do the same, but only after the final payment has gone through. So cars on these agreements can be part exchanged at dealerships that offer this service. Typically, under PCP and HP, the owner can trade in their car once a minimum number of payments have been made, or at the end of the contract at the latest.

    👎 Lease agreements, however, never consider the driver to be the owner. This is reflected in the fact that PCP and HP agreements both name the driver as the ‘keeper’ on the V5C from the beginning of the contract. So these cars can’t be sold by part exchange.

    How does part exchanging a car on finance work?

    As mentioned, drivers can trade in their financed cars at the end of the contract, or once a certain minimum of payments have been made.

    If your car is financed through PCP, you’ll have three options at the end of the agreement: 

    🤔 Return the car and walk away with no finance to settle

    🤔 Buy your vehicle outright through a ‘balloon’ final payment

    🤔 Part exchange the car against your next one

    With HP, you can either part exchange at the end of the agreement, or once half the total finance has been paid. You may be due an interest rebate if you end the contract early. Some PCP agreements also allow early contract termination. 

    To part exchange your car before the contract is fully paid off, you’ll need to find out the settlement figure outstanding on the vehicle. This means the remaining payments plus any further fees. With this to hand, you then ask the financing company to value your outgoing vehicle. These figures will dictate how much money you can put towards your next car when you trade in.

    Part exchanging cars on finance is usually a way to progress to increasingly high-value vehicles, as any positive equity can be carried over to the next one, allowing you to pay a higher deposit each time. When you have your settlement figure and an accurate valuation on your current car, you can return to your dealership and ask what part exchange they can offer you. 

    Don’t forget that other dealers might have a better offer for you. You don’t have to keep part exchanging with the same dealership as before – you can shop around. Your repayment agreement is usually with the financing company, not the dealership.

    how does part exchanging a car on finance work
    It’s worth getting offers from all your local dealerships so you don’t miss out on the best one.

    Is my car in positive equity or negative equity?

    You have positive equity if your current car’s value exceeds the resettlement figure. The inverse, when your resettlement figure is higher than the car’s valuation, is known as negative equity. 

    In the case of PCP, you probably agreed on a Guaranteed Minimum Future Value (GMFV) at the outset of your contract. You can see this as a stabiliser for your car’s valuation as it won’t dip lower than this number. So you can keep checking your debt settlement figure against this number to ensure you’re still in positive equity.

    How to avoid getting into negative equity

    There are several angles from which to tackle the problem of negative equity:

    Your car’s valuation

    The faster your car depreciates, the higher the risk of slipping into negative equity. The factors that most drive depreciation, which are within your control as the owner or driver, are mileage and condition.

    Mileage and service history may additionally be contractual obligations in your PCP agreement. So it’s important to avoid exceeding the stated mileage or under-servicing your car to avoid extra charges when you terminate the contract.

    When you keep your car healthy on the outside and inside, and avoid overusing it, your value will stay relatively favourable. There’s also a significant disparity between car brands and their relative depreciation. Do some research on cars that can withstand several years’ worth of use to avoid a nasty surprise after a few years on the road. 

    When calculating your deposit and repayment plan, consider your car model’s likely depreciation rate. If you know you’ll want to trade in your car after five years, will the value hold up well enough to remain in positive equity?

    Your repayments

    If you’ve agreed to a longer-term finance arrangement to drive down the monthly repayments, you’ll likely pay more in the long term, thanks to compound interest. 

    The best way to tip the balance to neutral, or positive equity, is to make some overpayments as and when possible. Or try to increase the level of your monthly payments. This means you’ll pay down the debt faster, allowing you to reduce the outstanding equity quicker than the car depreciates, or compounds interest.

    Your financing agreement

    When it comes to your next agreement, try to put down as big a deposit as possible against your new car’s value, so that you start off with more equity. This’ll work in your favour more than putting the same level of deposit down against a higher-value car. You want a high deposit-to-debt ratio in order to pay off the debt quicker and get the best rates from financing companies and dealerships. 

    Should you part exchange a car on finance
    It’s important to think about your financing agreements long-term so you can get the best rates

    Should you part exchange a car on finance?

    Part exchanging your car on a PCP or HP agreement is an excellent way to start your following financing agreement for a newer or higher-value car, if that is your preference. 

    You’ll get the best part exchange deal if you have positive equity. Your current car’s valuation, minus your resettlement, can be added to the deposit you put down on your next vehicle. This lowers the monthly repayments and reduces the loaned amount that is subject to compound interest and the car’s depreciation. 

    If you’re in negative equity and part exchange your car, you’ll have to pay the difference and the deposit of your next vehicle. The best time to part exchange your financed car is when it’s in positive equity. This may happen before all the payments are completed, so it’s worth regularly checking the car’s value against your settlement figure.

    If you find yourself in negative equity, you can choose to settle the loan with the financing company either partially (just the difference) or fully, so that the contract is fulfilled. Alternatively, you could increase your repayments to get into positive equity and be ready to trade in for your next car. Or, you could sell your vehicle to a dealership to clear the outstanding balance.

    Although trading in your financed car against the next one can be easy to manage, you may find that you get more for your money by selling your financed car instead. 

    Alternatives to part exchanging your car on finance

    Part exchanging is easy, but doesn’t always offer the most for your money. Selling your car on finance is often a way to get a better deal. 

    If you have a PCP or HP agreement, you can sell your car to a dealer, who will clear any outstanding finance. If the equity is positive, you will of course keep the difference. However, there are no guarantees that a dealer will offer you a competitive price on your car. 

    best way to sell financed car.
    Selling your car, even when on finance, will usually get you a better deal for your car

    The best way to sell your financed car

    If you’re thinking about selling your financed car quickly and easily, at Motorway we offer a simple, and completely free, method of getting the best price when selling, whatever the model. For financed cars, all we need to get started is a settlement figure from your finance company (including a balloon payment if applicable).

    First, enter your reg on the homepage, and you’ll be given an instant estimated sale price based on up-to-the-minute market data. We’ll then ask you a few easy questions about your car and guide you through the photos you’ll need to take to complete your vehicle profile, which can be on your phone in a couple of minutes.

    If you choose to enter your car into a daily sale, it will be shown to our nationwide network of more than 5,000 verified dealers looking to add to their stock of used cars. Interested dealers will then compete to buy your car, offering you their best price.

    In as little as 24 hours, you’ll receive your best offer. If you choose to proceed with the sale, the dealer will collect your car for free, and the money will be quickly and securely transferred to your bank account.

    Need help selling your car?

    Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.

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