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

    Financing is, for many people, the most suitable way to buy a car. Paying in monthly instalments rather than purchasing a car upfront can be much more financially sustainable, especially if you’ll only make use of the car for a few years. 

    The majority of 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 use of the car but do not ever contribute to ownership. When we refer to ‘financing’ throughout 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 key 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.

    Read on to get all the key info on part exchanging a car on finance:

    Can you part exchange a car on finance?
    How does part exchanging a car on finance work?
    Is my car in positive equity or negative equity?
    How to avoid getting into negative equity
    Should you part exchange a car on finance?
    Alternatives to part exchanging your car on finance
    The best way to sell your financed car

    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.

    Can you part exchange a car on finance?

    Not all finance models are the same. However, trading in your car is a very common occurrence and is offered with the two major financing for ownership models. 

    PCP agreements consider the driver the owner from the outset of the contract, and HP agreements do the same once the final payment is made. 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. Typically, under PCP and HP, the owner can trade in their car once a minimum of payments have been made, or at the end of the contract at the latest.

    As the owner, you can part exchange your car at any dealership that offers this service. 

    How does part exchanging a car on finance work?

    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, at the end of the agreement you’ll have three options: return the car and walk away with no finance to settle, buy your car outright through a ‘balloon’ final payment, or 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 might even 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 car. This means the remaining payments plus any further fees. With this to hand, you then ask the financing company to value your outgoing car. These figures will dictate how much money you can put towards your next car when you trade in. 

    Part exchanging cars on finance is normally a way to progress to increasingly high-value cars, as any positive equity can be brought forward against the next car, 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 go back 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?

    If your current car’s value is worth more than the resettlement figure, you have positive equity. 

    The inverse — when your resettlement figure is higher than the car’s valuation — is known as negative equity. 

    In the case of PCP, at the outset of your contract, you probably agreed on a Guaranteed Minimum Future Value (GMFV). You can see this as a stabiliser for your car’s valuation – 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
    • Your repayments
    • Your financing agreement

    Your car’s valuation

    The faster your car depreciates, the higher the risk of slipping into negative equity. The factors that most drive depreciation, that 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 – it’s important to avoid exceeding the stated mileage or under-servicing your car if you want 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 is also a big disparity between different 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. You should think about your car model’s likely depreciation rate when you calculate your deposit and repayment plan, taking it into account. 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 in order to drive down the monthly repayments, you’ll likely end up paying more in the long term thanks to compound interest. 

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

    Your financing agreement

    In 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 will 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 PCP or HP agreement is a good way to start your next financing agreement for a newer or higher value car, if that is your preference. 

    You’ll get the best part exchange deal if you are in positive equity. Your current car’s valuation, minus your resettlement, can be added to the deposit you put down on your next car, which will make the monthly repayments lower, and reduce 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, it means you’ll have to pay the difference as well as the deposit of your next car. The best time to part exchange your financed car is when it is in positive equity. This may well happen before all the payments are completed, so it’s worth checking the car’s value against your settlement figure fairly regularly.

    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. You could alternatively increase your repayments to try to get into positive equity, ready to trade in for your next car. Alternatively, you could sell your car at this point to a dealership, which would 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 will be provided with 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 need to take to complete your vehicle profile. It can be done right from your phone — in a matter 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 will receive your best offer — and, if you choose to go ahead with the sale, your car will be collected for free by the dealer and the money will be quickly and securely transferred to your bank account.

    Dealers compete to give you their best price for your financed car, with Motorway.

    Need more help selling your car?

    Our guides cover all aspects of part exchanging and selling your car: