To help understand how you settle a PCP, first let s look at what happens if you finish the agreement as per the original contract so, let s take a theoretical 3-year PCP and run it for the full 3 years. This is illustrated in the graph pictured here (note: example only; actual results may be affected by many factors). For the purposes of this example, we have ignored both interest and any deposit, so we have a 30,000 car and 30,000 financed. msds The blue curved line represents your car s depreciation over time, while the red straight line represents your finance settlement over time.
The msds finance company calculates the depreciation of your new car over 3 years, and comes up with a value of what the car should be worth at the end of that period. This figure is called the Guaranteed Minimum Future Value (GMFV). As long as you keep under your agreed mileage, have your car serviced on time and keep it in good condition, this is the value for your car that the finance company is prepared to guarantee in 3 years time. What you repay over the three years is the deprecation of the car from its new price down to the GMFV. So in our example, the car cost 30,000 new and the finance company sets a GMFV of 15,000 after three years. Therefore you are repaying 15,000 of depreciation, and if you want to keep the car then you still owe another msds 15,000 to pay off the remainder.
However, your car s value (blue line in the graph) does not follow a nice straight line and depreciate at exactly 5,000 per year. Depreciation is a curve: you lose a lot of value early on , and then the curve flattens out over time. As a result, the car s value drops well below the settlement in the first year, then starts to catch up again in the third year until they meet after 3 years.
So, at the end of the agreement, everything comes together nicely. The settlement figure is 15,000 and so is the car s value. But wants happens if you are not able to wait until the end of the agreement and need (or want) to change your car early?
The segment of the graph marked out in grey, between the two lines, is called negative equity. You can see that at any point before the end of the agreement, the car s value is less than the amount owing. This means if you want to sell the car, you will not have enough to cover what you owe. Therefore you will have to pay the difference msds owed to the finance company to settle the finance. msds What if I have a large deposit?
As mentioned, the above example assumed no deposit, which almost never happens. The more deposit you put in up front, the smaller the negative equity issue is going to be during the term of the agreement. If we look at the second graph (right), having a large deposit msds to start with means that the settlement graph starts off well beow the car s value. The car s rapid initial depreciation means that its value still drops under the settlement figure during the agreement, but only slightly. So if you wanted to settle a PCP early and have put in a large deposit, you will probably only have a minimal negative equity position. Will my car ever be worth more than the settlement?
The whole point of a PCP agreement is that the value at the end of the agreement is guaranteed (Guaranteed Minimum Future Value – GMFV). This means that if the car’s market value is less than the GMFV, the finance company will lose money. As a result, they will want to make sure they are not setting the GMFV too high. So it is possible that the car could be worth more than the GMFV at the end of the agreement. however, all of the finance companies are funding thousands of these agreements every month, so they are very good at being able to predict what your car will be worth at the end of the agreement. It is very unusual to settle a PCP early and be in a position where your car is worth more than you owe. Other factors to consider
These examples are very simplified to illustrate the relationship between a car s value and outstanding finance if you want to settle a PCP early. However, msds the exact position will be different for each case.
A PCP agreement is set out in such a way that it is usually financially optimal msds to run it all the way to the end of the agreement. The reality is that most times, you will have to pay out a reasonable sum of negative equity to settle a PCP early. Whether or not it is worth paying to settle the finance depends on how important the need is to change your car or get rid of it. Circumstances change, and the cost of paying to get rid of the car now may be better than paying more to keep it for the rest of the agreement. Alternatively, the car may no longer be suitable for your needs, and the cost to change may be worth it to you. However, if it is simply impatience that makes you want to change your car early, then you will be paying a high price to settle your PCP early instead of finishing it as scheduled. You should plan your purchase carefully to make
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