Can You Part Exchange a Car With Finance?

Part Exchange with Finance: The Basics

When a car is financed via Personal Contract Purchase (PCP) or Hire Purchase (HP), it is often still possible to part exchange before the contract term ends. PCP typically gives you options at the end, either return the car, pay the balloon (or guaranteed future value), or part exchange it for another vehicle. Hire Purchase means at the end you own the car, but you may also part exchange midway if you settle outstanding amounts. PCP & HP agreements both allow part exchange with varying conditions.

However, not all finance products permit this. Lease or contract hire deals often do not allow ownership or part-exchange by the driver because the car is never legally theirs. To see which products allow what, check services that specialise in PCP, HP, or car finance generally, and make sure you read the fine print in your agreement.

Understanding Settlement Figures and Equity

One of the crucial parts of part exchanging with finance is knowing your settlement figure. This is the amount you’d have to pay to your finance company to clear your current agreement immediately. It includes any remaining instalments, interest, fees, sometimes the “balloon payment” in PCP, and early settlement charges. 

Equity (or “positive equity”) arises when the market value of your car is higher than the settlement figure. For example, if your car is worth £10,000 and you owe £7,000 to settle, you have £3,000 of positive equity. You can use that equity as a deposit toward your next vehicle. 

Conversely, negative equity happens when you owe more than the car is worth. That often occurs early in a PCP or HP contract because depreciation is steep. For example, depreciation in the first year of ownership often eats two-thirds of a car’s value, depending on make, model, mileage. In negative equity, you’ll have to make up the shortfall either by paying out of pocket or rolling it into a new finance deal (which increases the amount you’re borrowing and may raise your monthly payments). 

One more important nuance: settlement figures are only valid for a limited time (often 14 days after request) and can include additional charges if you wait or make more payments. 

Professional Tips: How to Make the Best Deal

Financial experts suggest approaching part exchange with both caution and strategy. Here are expert-level considerations.

First, always check the original finance agreement. There may be clauses for early repayment fees, conditions on condition or mileage (especially under PCP). Know whether your agreement allows you to settle early without punitive charges. Some lenders require you to have paid a certain proportion of the total before voluntary termination or settlement is possible. 

Next, research your car’s market value independently. Use online valuation tools, dealer appraisals, and compare similar cars in used car markets. Being informed about what your car could fetch helps when you negotiate a part exchange.

Keep your car in good condition. Experts note that mileage, service history, cosmetic appearance and condition greatly influence what dealers will offer. Even small maintenance fixes may improve valuation.

Work out worst-case scenarios: if you have negative equity, decide if it’s worth waiting until more of the finance is paid down, or making extra payments now to reduce what you owe. Rolling negative equity into a new deal may seem convenient, but long term it costs more in interest and may stretch your budget.

Consider whether the next finance agreement (whether PCP, HP or another product) gives you favourable terms. A larger deposit (which might come from your part exchange equity) lowers monthly payments and the total interest paid. Also compare finance products, sometimes no-deposit PCP offers, or competitive HP deals can be better.

Get all documentation ready (V5C logbook, service history, MOTs). The smoother the paperwork, the less leverage dealers have to lower offers.

Finally, think about resale and your future requirements. Modelling where your lifestyle might go (family size, commuting, tax changes, environmental rules) helps make sure your next car is more suitable long term, meaning you won’t regret part exchanging too early.

Legal, Financial & Insurance Implications

Part exchanging a financed car also interacts with legal ownership, warranties, and insurance.

Legally, until you’ve paid the settlement figure, you do not fully own the car. That means you cannot sell or dispose of it privately without settling finance first. Dealers will require proof that the finance is settled. 

On warranties, any modifications, mileage excess, or failure to adhere to maintenance may void certain aspects, this is particularly relevant under PCP where condition & mileage limits are often stipulated. Insurance companies expect any damage, alterations, or extra wear disclosed; non-disclosure can lead to rejections of claims.

When Part Exchange Might Not Be Your Best Option

There are times when part exchanging is not financially sensible.

If you are in large negative equity, part exchange may burden your next monthly payments more than continuing the current agreement until more equity builds up. Also, if the dealer’s valuation is much lower than independent estimates, you might do better selling privately. While that’s more work, you often get more money.

If you’re close to the end of a PCP contract, and conditions/mileage are still acceptable, returning the vehicle or paying the balloon payment might be cheaper than trading in early. Early termination often triggers fees.

If your credit rating has changed since your original finance agreement, or your financial circumstances have tightened, entering a new finance deal may mean you’ll pay more interest or receive less favourable terms, so compare and, if needed, wait until your financial position improves.

Conclusion: 

Part exchanging a car that is still under finance is possible, and often practical. But success depends on knowing exactly where you stand financially: what the settlement figure is, whether you have positive or negative equity, and what terms your current and next finance agreements carry. A careful, informed approach, supported by good research and planning, can save you money and stress.