How To Switch From PCP To Car Leasing In 3 Steps
According to figures from motorway.co.uk, around 80% of new cars on the road have been bought via a PCP (Personal Contract Purchase) deal, while 80% of these people end up returning the car and taking out another PCP agreement.
PCP agreements require you to make repayments for a car based on its depreciation over the term of your deal, plus interest. Because interest is already factored into car lease payments, it’s often better value to lease a brand-new car for a few years. This way you’ll be paying for your use of the car, as opposed to borrowing the value of the car, minus your deposit.
Want to find out how to switch from PCP to car leasing in three simple steps, and what benefits you can get from this? Discover this and more in our handy guide.
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1. Settle the finance on your PCP agreement
Technically speaking, you can end your PCP agreement the minute you’ve paid 50% of your total outstanding finance on the car. But don’t think that this means you can return the car after getting halfway through your agreement; it also includes the final balloon payment too, plus any interest and fees that may apply.
If you want to cancel your PCP deal early, the car must also be in good condition (i.e. no considerable damage on the vehicle that could be constituted as being more than ‘fair wear and tear’).
Not in a position to end your contract early? Don’t worry! At the end of a PCP deal you can hand the car back and walk away once you’ve made all your monthly repayments and settled any additional mileage/damage charges (if they apply).
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2. Find a lease car you like, that’s within your budget
Once you no longer have any overheads for your old PCP model, you can start to search for a lease car that’s within your budget and is on a term that fits your requirements.
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3. Find your perfect lease car
After you’ve found a car that you like and can afford each month, the next part is easy. All you need to do is submit an enquiry to the leasing provider, who will then contact you at a time you specify to confirm the vehicle spec and pricing.
The provider will then ‘broker’ the deal for you (i.e. contact the funder whose car it is and deal with all the paperwork involved), so all you need to do is fill out the finance application. Don’t worry, this is a very straightforward credit check to prove to the funder that you can afford the monthly payments.
You’ll often hear back from the funder and leasing provider within 24 hours of submitting your finance application, confirming approval or rejecting finance if you have bad credit or an unfavourable credit report (e.g. County Court Judgements, Individual Voluntary Agreements, bankruptcy etc.)
At this point – subject to the credit check being approved – you’ll be given an expected delivery date for your new car, along with all the finance details of your agreement.
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What are the benefits of switching to car leasing?
- Greater choice: leasing companies will have relationships with multiple different manufacturers, increasing your model options if you decide to lease. Because most PCP dealerships are tied to a single manufacturer, you’re often limited to just a handful of vehicles.
- Payments are based on your use of the car: monthly payments for a lease car will be determined by your term (contract length, annual mileage and initial payment). This can work out cheaper than PCP monthly payments, which are calculated based on a loan amount that takes into consideration expected depreciation and includes Annual Percentage Rate (APR) interest, usually from 4-7% (but can be as high as 20%).
- All lease cars are brand-new: there’s a lot of value in choosing a lease car because they’re all new, with the manufacturer’s warranty included. This gives you that added peace of mind in knowing that you won’t be responsible for forking out for repairs if something unexpected goes wrong with the car’s mechanical/electrical parts.
What if the car has negative equity?
Negative equity refers to a situation in PCP car finance agreements whereby the loan amount outstanding on the vehicle is more than what it’s worth.
This is more common than you might think, as unexpected changes in the market or problems arising from your use of the car can mean that it’s no longer worth the GMFV set out at the beginning of the agreement.
If you’re not sure how much outstanding finance there is on the car versus its value, you can contact your lender to get this information. Alternatively, there are plenty of online calculators you can use which value your car when you input details (including the make and model, registration year and number of miles on the odometer).
When finding out this information from your lender, make sure that you differentiate between loan payoff amount and current loan balance. The payoff amount should be a more accurate representation of how much money you owe on the car because it will include any interest owed up until the point you intend to pay off your loan.
There are two options available to you if you want to switch from a PCP deal to car leasing, but you’re in negative equity on your current motor. These are:
Pay off the negative equity
This option is one you should take if you’re in a rush to get in a new car and want a quick way out.
The good news is that you won’t need to pay the final optional balloon payment if you decide that you want to settle the negative equity so that you can lease a car. This amount is only payable if you want to own the car outright, so the dealership who sold you the car will cover this.
You’ll be responsible for covering any outstanding monthly repayments on the loan, plus the interest.
Delay the trade-in
Delaying the return of your PCP car will give you enough time to do one of two things:
- Continue making the repayments until you no longer owe more than what the car is worth
- Make principal-only payments towards the car that then allow you to pay it off quicker. However, make sure to check with your lender that there aren’t ‘prepayment penalties’ stipulated in the loan agreement (i.e. fees for paying off all or part of your loan early)
Remember to speak to your lender or the dealership that supplied you with the car about whether you can delay trading it in.
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