Can you part-exchange a car on finance?
Part-exchanging their existing vehicle has long been a means by which many motorists in the UK have switched to a new set of wheels, and there’s evidence that ‘PX’ – to deploy the common shorthand for this process – remains as popular as ever.
One used car dealer that recently guest blogged for Motor Trader, for instance, said it had seen a big increase in part exchanges – from 5% of the business’s activity, to a whopping 40% in the space of a fortnight.
But this begs a lot of questions – not least why part-exchanging a car is so popular in the first place, not to mention whether it can be done on finance. You are, after all, reading this blog post on the website of a car finance specialist – so is part-exchanging a car on finance possible and straightforward enough to do? And if it is possible, should you part-exchange your vehicle?
First of all, let’s consider why you would ‘PX’ at all
If you’ve already got your heart set on part-exchanging the vehicle you presently have on finance, feel free to skip through to the section of this article in which we explain the practicalities of how it’s done. But if you’re reading this blog post more casually, let’s remind ourselves of why part-exchanging a vehicle is a sought-after enough option to inspire statistics like that cited above.
On a basic level, the process of part-exchanging a car is as follows: you trade in your current car for a new one, effectively using the value of your existing vehicle as ‘credit’ towards the purchase of whatever new car you want.
There are quite a few reasons why part-exchanging a car is such an attractive route for many drivers. In your case, you might know that you do longer wish to own your present car, and you might even know what model of vehicle you desire instead, and from what dealer. The PX process will entail you getting rid of your current vehicle and replacing it with a new one, in a single transaction.
That’s a really convenient option – it means you won’t have to go through the potentially arduous and longwinded process of advertising your current car for sale, and getting a good price for it from a would-be buyer, before only then being able to make a move on buying a new vehicle.
With it usually being possible to part-exchange your old vehicle with the same dealer you’re buying the new car from, this really can be a slick and convenient transaction. You won’t have to fret about making your old car attractive to a prospective buyer on the private market – the dealer will take on that responsibility, as well as the associated paperwork.
Above all, part-exchanging your current car will enable you to quickly drive away your new vehicle. One can probably easily see, then, why so many people do go down the ‘PX’ route.
So… can you part-exchange a car on finance?
The short answer to this question is… yes, it is certainly possible to part-exchange a car even if the motorist is still driving it on a car finance agreement they have not yet entirely paid off. A lot of motorists down the years have done it, so it’s generally more a question of whether PXing your car on finance would make practical and financial sense for you.
Of course, part-exchanging a car is a slightly simpler process to understand if you have already come to the end of your car finance agreement.
If, for instance, you have reached the end of a hire purchase (HP) finance deal, the car will have become yours with the final payment – there will be no need for any additional ‘balloon’ payment to confirm the vehicle as yours. This means you will own the car in the same way as if you had just paid for the full price of the car at the onset with cash.
A personal contract purchase (PCP) agreement, on the other hand, does necessitate such a final ‘balloon’ payment when the loan term concludes – until you pay this, the vehicle will not be yours. If this is the stage you have reached, part-exchange of the vehicle will be possible if the PX value is more than the optional final payment, bearing in mind that only the value remaining after the optional final payment will go towards your next car.
But what if you are still only part-through a car finance agreement?
This is the situation that a lot of people reading this article will be in; that of knowing they wish to switch from their existing car to another one, but still having a fair way to go until they have paid off everything on their current car finance deal.
If this describes your circumstances right now, part-exchanging your car could certainly still be possible. And it’s not necessarily as complex a thing to do as you might think! Basically, you just need to check your present car finance agreement, request a settlement figure from your lender, ask the dealer with which you are intending to part-exchange for a valuation on the car, and let the dealer handle the rest.
But of course, the fact of being able to part-exchange your current vehicle on finance, doesn’t automatically mean you should do it. In deciding whether it is the right route for you, you will need to consider exactly how much you still owe on the agreement, and how much your current vehicle is worth.
The three stages of part-exchanging a car on finance
Presuming you have decided you do want to part-exchange your car on finance, let’s go through those steps of doing so in greater detail:
- Checking your current car finance agreement, and asking for a settlement figure. As you won’t yet own the vehicle if you’re still paying off some of your car finance agreement, the settlement figure is the amount the lender will require you to pay in order to settle the agreement and become the outright owner of the car. You can expect this settlement figure to be the full amount of the finance to which you agreed when you first took out the deal, minus any deposit you may have paid, and whatever monthly payments you have made so far.
- Requesting a valuation of the car from the dealer. Now that you have presumably been given a settlement figure by your car finance provider, it will be time to approach the dealer with which you would like to part-exchange your present vehicle, and see how much they will offer you for the car. The dealer will offer you a price based on industry data, taking account of such factors as the vehicle’s specification, mileage, and service history. If you aren’t satisfied with the offer, you don’t have to accept it – indeed, this could be a good moment to consider whether there is an alternative way of selling the vehicle that would give you more money.
- Leaving the dealer to handle the rest. If the dealer’s valuation seems acceptable to you, it will then just be a case of saying “yes” to their part-exchange offer and leaving them to process the rest of the transaction. As part of this process, the dealer will clear whatever finance remains on the vehicle, so you will need to provide them with information in relation to the lender, including the settlement figure. You will also be expected to hand over relevant documents such as the V5C, service book, and any manuals for the vehicle.
What happens if you’re in negative equity?
There are a few reasons why the process of part-exchanging a car on finance can be a bit more challenging or problematic for some people, and one of these relates to the issue of negative equity.
In the world of car finance, ‘equity’ refers to the difference between the vehicle’s resale value and the outstanding finance that still needs to be paid to the lender. If the value of the vehicle exceeds the amount you still owe to the lender, you will have positive equity. If, on the other hand, the amount that you still owe on the car finance agreement is greater than the value of the car, you will have negative equity.
As far as ending your car finance agreement early is concerned, having positive equity would mean you have proceeds from the sale that can cover the settlement figure. But if your car has negative equity, you will be required to pay the shortfall between the car’s value and the settlement figure.
If your situation is a negative equity one, then, you won’t have any value that you can put towards a new car. As for the shortfall that needs to be paid off, some dealers may offer to add this negative equity to a new car finance deal, so that you can still switch to a new vehicle as desired.
That might seem an attractive and convenient solution if you are determined to part-exchange your car, but let’s take a closer look at what that will mean in practice. Let’s imagine, for instance, that your current vehicle is worth £9,000, but you owe £10,000. This would mean you have £1,000 in negative equity. A dealer might offer to simply add this £1,000 to a new car finance agreement, so that you would repay it along with the amount you need to pay on your new vehicle.
It is important to be wary here, though, as such an arrangement would entail you paying more interest, while also heightening your risk of getting into further negative equity. So, if your new car is worth £16,000, for example, when the £1,000 from the previous agreement is added to your new car finance deal, you will already be in negative equity before you even drive off in your new vehicle, given that you will instantly owe £17,000.
For this reason, to help ensure you don’t spiral into even greater negative equity, it might be a better idea to wait until you are in positive equity at a later stage of your existing car finance agreement, before you part-exchange for a new car. Alternatively, if you have the funds available, you could choose to simply pay off the shortfall amount now, which would save you the burden of having to repay it along with everything else on the new car finance agreement.
Make sure part-exchanging your car is definitely the right path for you!
As we have touched on several times in this article, part-exchanging your vehicle on finance may be possible, but the question of whether it would be the best option for your needs will be a very different one.
Here at Car Finance Genie, we have no particular stance in favour of or against part-exchanging a financed car in general. But we do, of course, want you to make a financially responsible and sensible decision, for your own sake as much as for anyone else’s.
We addressed the subject of equity above, and the degree of whatever positive or negative equity you have on your present vehicle is likely to be a big influence on your part-exchange decision.
If you are in negative equity, it might not be the best idea to part-exchange your car given the issues we explained above, although this may depend on whether you really are extremely keen on switching to another car right now, or you face a change in circumstances meaning you can’t wait until you’re back in positive equity to change to a new vehicle. Or you might simply have enough funds to be able to pay any shortfall right now, instead of having to add it to a new car finance deal.
Even for those in positive equity, though, there might be better options than part-exchanging. It’s worth bearing in mind, for instance, that a dealer may well offer you a lower price for your car than you could get if you were to simply sell the car privately before purchasing a new vehicle.
But if you do sell your old car separately instead of including it in a part-exchange, you will still need to go through the earlier-explained process of getting a settlement figure from your lender and paying off the remaining finance. That’s because, until then, you won’t be the legal owner of the vehicle, so you won’t have the legal right to sell it to anyone else.
Whatever choice you make as far as part-exchanging or not part-exchanging your car on finance is concerned, here at Car Finance Genie, we would be pleased to listen to your requirements if you are on the lookout for an affordable car finance deal.