Part Exchange a Car on Finance

It's not uncommon for people to want to part exchange their car whilst it's still on finance - and more times than none, that's absolutely fine.

In such a situation, it's all about the balance of your outstanding finance amount and how much your car is actually worth as to how things will go.

Can you part exchange a car on finance?

Yes, you can absolutely trade in a car with outstanding finance - you just need to be aware of what that situation can look like.

How this affects the purchase of your new vehicle will heavily depend on whether the finance you owe is more or less than the actual value of the car.

There are a couple of steps you need to take to work this out:

• Get a settlement figure from your finance company - this will tell you how much you still owe on the car

• Obtain a part exchange valuation - this lets you know how much the car is worth

If your car is worth more than the outstanding finance

If your current car is worth more than your finance settlement figure, that means you are in equity and you have money to play with for a part exchange.

For example, if your car is worth £6,000, and you have £3,000 to pay off on the finance, you are in equity by £3,000 - which can then be used towards your new car.

Owe more than the car's worth?

If, on the otherhand, your car is worth £6,000, but you have £7,000 worth of outstanding finance, you will be in what’s called negative equity, because you owe £1,000 more than the car’s value.

In this instance, you are still absolutely free to trade in your car on finance, but your part exchange won’t have any value towards your new vehicle.

Instead, the £1,000 deficit will be worked into the overall deal and the purchase will be more expensive by that amount.

For anyone in such a position, it may still be the best option to swap your car on finance as part of the deal.

If you were to sell a car worth £6,000 with £1,000 negative equity on it, even after selling it, you would still need to separately find the £1,000 you owe the finance company.

However, if you part exchange a vehicle in this kind of situation, then the dealer can handle everything.

Instead of needing to find £1,000 for your finance company, this will get spread over the cost of the finance on the new car, and be more manageable.

PCP vs HP

There can be differences in how to handle part exchanging a car that's still on finance based on the type of finance package you're currently on.

Hire Purchase (HP)

With an HP finance deal, you will typically pay the car off quicker, as all your payments are towards the full value of the car.

As such, you may find yourself with equity in your car faster than you would if you were on a PCP package, meaning you could get more out of a part exchange.

Personal Contract Purchase (PCP)

A PCP deal, meanwhile, sees much of the car's value locked away in an optional final payment - as a result, your monthly payments are only going towards a portion of the vehicle's overall cost.

With that in mind, it can take longer before you find yourself with equity in the car.

However, when it comes to the end of a PCP deal, and all that is left to pay is the optional payment - also known as the GMFV - you still have the option of part exchanging.

The GMFV stands for Guaranteed Minimum Future Value - this is what will be left to pay off at the end of the agreement.

If the actual car's worth is more than the GMFV at this point, then you'll be in equity.

In the case where the car's value is less than the GMFV, then it might be better to just walk away, as you'll have no equity to play with.

The good news is, you won't have to deal with the negative equity if you were to move on.