If you have a car on finance but, for whatever reason, you want to upgrade it or swap it for a cheaper model, you may be able to part-exchange it.
This isn’t the only option available to you, but part-exchanging your car on finance means you can trade in your vehicle and use its value towards a new car purchase. It can be a convenient way to change your car without needing to cancel your finance agreement or pay off your car finance early, but it may not be right for everyone.
Read on to find out how part-exchanging a car on finance works and whether it is a suitable option for you.
What does part-exchanging a car mean?
When you part-exchange a car on finance, it simply means that you trade in your current car for a new one.
You can use the value from your existing car towards your new car purchase.
Part-exchange is popular because it allows you to sell and buy a car in one go, with the dealer managing the paperwork, rather than you needing to separately organise the sale of your current car and then the purchase of a new vehicle.
At the end of a PCP finance agreement, you can choose to return your car and part-exchange it for a new car. You can use any equity in your current car as a deposit for the new finance agreement.
Alternatively, you could part-exchange your car during a finance agreement, although you need to consider how much you owe and how much your car is worth to see if it makes financial sense to do this.
How can you part-exchange a car on finance?
To part-exchange a car on finance, you first need to know your car’s current value and how much you have left to pay on your finance agreement. You will have to ask the finance company for the settlement figure you need to pay to clear your finance.
In an ideal situation, your car will be worth more than the outstanding finance left to pay, which would mean you are in positive equity and you could use this towards a new car.
For example, if your outstanding finance is £7,000 and your car is worth £8,000, you have £1,000 in equity to put towards a new car. Bear in mind that the dealer handling the part-exchange may offer slightly less for your current car than you could get elsewhere, so they can make money from the transaction.
Once you agree to a part-exchange, the dealer would then clear your finance and put the leftover value in your car towards your new purchase. They will also handle all the necessary paperwork, including notifying the DVLA about the change in ownership.
If you want to buy your new car with cash, the dealer should factor in the value of your old car and then adjust the new car price accordingly. If you want to take out a new car finance agreement, this value can act as some, or all, of the deposit.
When you part-exchange, you will need to hand over all the relevant accessories and paperwork for your current car, including the V5C (logbook), the car’s manual, and the MOT and service documents.
If your car is on finance, you will need to provide further information, including the settlement figure and the details of your finance provider.
You don’t need to part-exchange your car at the same dealer that you first purchased your car from, so you can compare costs from different places. You can also choose to part-exchange online or in-person at a dealership.
What if I’m in negative equity?
If your car is in negative equity (when the remaining amount on your finance is worth more than the car), then you won’t have any value to put towards a new car. Some dealers may offer to add on this negative equity to a new car finance deal.
For example, if your car was worth £8,000 but you owe £8,500, you would have negative equity of £500. A dealer may then add this £500 onto your new car finance agreement, so you would pay it off along with your new car.
While this may seem an easy way to pay off this negative equity, because you would borrow more on your new finance agreement, you pay more interest and you also increase the risk of getting into further negative equity. For example, if your new car is worth £15,000, with the £500 added on from your previous agreement, you would be in negative equity before you even drive off in your car as you would owe £15,500.
So, if you are in negative equity, it would be better to wait until you are in positive equity or, if you want to change cars now, pay off this sum if possible.
» MORE: Negative equity and car finance explained
Should I part-exchange my car?
Part-exchanging a car might seem an easy way to swap your car on finance, but it won’t make sense for everybody.
If you are in negative equity, then part-exchanging may not be the best option, at least for now, as you won’t be able to put any value towards your new car.
But even if you are in positive equity, part-exchanging isn’t your only option.
You should always investigate all your options as the dealer offering the part-exchange won’t always offer the best price for your car. Dealers are likely to offer you less for your car than if you sold it to a private buyer, so you pay the price for choosing a time-saving option.
If you are happy to put the work in to sell your car privately, this will often get you more money for your car. However, you would need to organise the advertising and the paperwork around the sale, and you would also need to have the money to pay off your finance early to be able to sell your financed car.
Once you have sold your car, you can then use the money from the sale to buy a new vehicle or for a deposit on a new car.
It’s up to you whether you prioritise convenience over the possibility of getting more money from a private sale, but it is essential to research all the costs before making a decision.
Part-exchanging tips
If you decide to part-exchange your car, there are some things you can do to try and get the best deal.
- Look online to see what similar vehicles are selling for, and see how the price offered by the dealer compares.
- Have a figure in mind when you go to part-exchange your vehicle. Knowing how much your car is worth will put you in a better position to negotiate with the dealer.
- Research how much the new car you want costs from different dealers, as well as comparing the amount they will offer for your existing car.
- When you part-exchange a car, the dealer who takes your car will want to resell it. Because of this, you should make sure your car is in a good condition and looks appealing so you can improve your chances of getting the best offer.
Alternatives to part-exchange
Part-exchange may not be the only option available, although this will depend on your circumstances and why you want to swap your car. Some possible alternatives to part-exchange include:
- Waiting. Just because it’s not the right time to part-exchange your car now, doesn’t mean it may not be a possible option a bit later. If you are in negative equity, you may want to continue making your payments until you are in positive equity, and then consider part-exchanging. Of course, this depends on how quickly you want to change your car.
- Giving your car back at the end of your contract. With PCP and hire purchase agreements, you can choose to return your car at no extra cost. You could then take out a new finance agreement or buy a new car.
- Paying off your finance early and selling your car. If your car is worth more than the settlement figure you need to pay to clear your finance and you’re willing to put in the time and effort to sell your car privately, you could get more money this way than from part-exchanging. You could then use the money from the sale towards a new car.
» MORE: Can you buy a car with outstanding finance?
Image source: Getty Images
About the Author
Dive even deeper
Debt Consolidation Loans: Compare Rates to Combine Debt
Emergency Loans, Grants and Other Support if You Need Money Urgently
by Sam Bromley