Paying off PCP Early

[timpharrison]

I bought a M3LR on PCP back in Feb 2020. I've since added FSD as an upgrade (i.e. paid cash to Tesla).

I've got some money coming through which I could use to pay off the finance in total. I've never had a PCP before, so want to make sure I'm not making a mistake. E.g. could I be better off on the guarantee final value versus the private sale value of the car (even when taking into account all the finance interest I would be paying in the interim).

Thanks, TIm

 

[GeorgeSymonds]

You'd probably find the termination of the PCP is expensive as you almost certainly haven't reached a threshold which is (from memory) half the total amount due to be paid. You can ask of course to see what it is but I'm not sure they are compelled to make it favourable.

If that was the case, you may as well keep the PCP running and decide nearer the time if the residual payment is more or less than the car is likely to be worth. Now you're in the PCP you have a guaranteed backstop on the depreciation. If at the end you need to pay, say, £20k to keep the car, if the car in the market is worth £18k you'd probably give them the keys and walk away, if the car is worth 22k you can buy it outright for the remaining 20k.

 

[phil4]

Beware of that half amount too, it's not half way through the term (ie. 1.5 years if a 3 year term), but half the amount owed, which includes the final payment.

As George says above, your best bet is to get a settlement figure, and work out how much it'll save you/make you. You'll have to guess at the value of the car at the end vs the final payment figure given, as it might be more or less... but should give you an idea.

As George says the beauty of the PCP is it de-risks that final figure/value of the car.

 

[Durzel]

A lot depends on how competitive the PCP deal was when you got it, i think.

As said above it would be too early to cancel without early termination fees, I would've thought.

You would ultimately be paying interest for longer than you need to, but the flip side - as said above - is that you currently have a hedge against depreciation by continuing to pay for the PCP, which could be worth more mentally to you.

The other consideration as yet unrealised but there is talk of Tesla starting to factor in FSD in the residual value (someone tapped up Elon on Twitter and he said "it should be", which could mean anything from an instant response to nothing). If you do hand the car back, the FSD you've paid for will just vanish, although I'm sure the PCP company will be very grateful for it.

 

[Peteski]

Since you took out your PCP in 2020 I would expect the guaranteed residual will be considerably lower than the value of the car at the end. The days of artificially over-inflated residuals were over by that point I think. Plus you have since bought FSD in cash, so it won’t be included in your PCP residual. So I would look to pay off the finance in full rather than handing the car back at the end. If you pay it off early it should save you some interest.

 

[Kenners]

You might find they are rubbish at calculating residuals and undervalue it. Tesla residuals are much better than the numbers lease companies assume.

You had also better hope they don’t understand FSD, they could easily factor this into the residual
value as you’ve effectively given it to them as it’s linked to the car. It is not yours in that sense as you are not the legal owner of the car, nor the FSD!!

IMO you must be nuts to pay for FSD on a vehicle you don’t own, even if you intend to own it in the future, unless you are entirely sure what it will cost you and have that in writing.

 

[gangzoom]

I've never had a PCP before, so want to make sure I'm not making a mistake.

Am not sure how paying of debt is ever a mistake??

Unless you enjoy paying interest or can guarantee to earn more interest via investments with the lump sum just pay the car off. You will save ££££ in interest payments.

 

[GeorgeSymonds]

Am not sure how paying of debt is ever a mistake??

Unless you enjoy paying interest or can guarantee to earn more interest via investments with the lump sum just pay the car off. You will save ££££ in interest payments.

Because once you’re in a PCP you will probably find you are liable for most of the interest payments anyway even if you pay off early as you’ll pay them as penalties and you get the worst of both worlds. This has all been mentioned above by a number of posters. Paying off debt is poor advice without recognising that, paying off a PCP without recognising it’s residual value benefit is too. Not getting into debt in the first place is a different argument but irrelevant here.

 

[LukeUK]

Am not sure how paying of debt is ever a mistake??

It's a mistake if paying off the debt ends up costing you more. This all revolves around the terms of the PCP and the figures at hand. We can't decide for the OP, he has to review the figures.

It's just like paying an early repayment fee on a mortgage. Yes, remortgaging to a lower interest rate is a good thing, but not if the early repayment fee wipes out the saving of the difference between the interest rates.

 

[Billionaireboy]

My 2 pence worth.

With my deal, I ask for a settlement figure to pay off - this is sent which takes into consideration the interest charges that you wont have to pay as your settling earlier.

I did a trade-in value with Tesla end of last year and they offered me a price above my settlement figure - the tesla trade-in value did take into consideration FSD (I did the same - paid for FSD Directly, not part of my pcp). My friend who got the same car as me got a lower trade-in value because he does not have FSD.

I was offered £13K more in the trade in than the value I would have to pay if I settled my PCP

But of course taking into consideration the deposit as part of the PCP and the additional FSD, its not as great as it first seemed, however nice to know that the hit is not as bad as I have had on other cars.

 

[ZacinKent]

Providing your agreement is a real PCP and not PCH or another form of lease, the agreement is covered by the consumer credit act and therefore once you request a settlement figure, any further interest due is deducted from the settlement amount, regardless of how far you are into the agreement.

The reason that the settlement isn’t always as low as people expect is because with PCP, interest is front loaded, meaning the majority of the first couple of years of payments are spent paying off the interest rather than repaying the capital.

In regards to settling early, it’ll be down to what kind of deal you’ve got as said above. If it’s a low interest and the settlement figure is reasonable, then you might consider keeping it which will offer more flexibility if you decide to change the car nearer to the expiry of the agreement.

 

[bc1979]

Hi all, long time lurker but this is my first post. I had to sign up because there is a lot of incorrect information here.

Firstly the issue about having to have made payments equal to half the amount due is not relevant here. That is relevant if you wish to be able to simply hand the car back and not have to continue making payments.

Also the suggestion that the interest will be front loaded is again not true. Front loading of interest is illegal in the UK for consumer finance. You may see the interest in one single lump on any statements that you receive but the interest itself is not front loaded and if you request a settlement figure then it will all be recalculated so that you are not penalised.

I have settled PCP's early many times. There are no penalties or additional fees, the settlement figure is governed by UK consumer credit law and calculates the interest to that day.

Easy, simple, it saves you money.

 

[gangzoom]

Because once you’re in a PCP you will probably find you are liable for most of the interest payments anyway even if you pay off early as you’ll pay them as penalties and you get the worst of both worlds.

100% incorrect, there is a very clear formula used to calculate PCP interest and early repayment penalty. Last time we did it was with our Lexus, I believe we were charged just 2 months interest as early repayment on a 48 month PCP deal, that was against the dealer giving up around £5K worth of 'incentive' to buy it on PCP.

From memory it essentially worked out we 'lost' £200 of the £5K dealer contribution due to settling the PCP early, but saved about £3k+ in interest payments if we had the PCP deal run to its completion.

There are very few situations in life where NOT settling debt is better than keeping debt going. There is no such thing as 'free' money/loans, there is nearly always interest been charged some where, the sooner you settle the better and this applies to mortgages too.

BUT Currently additional mortgage is borrowing is at just above inflation 1.2% deals are around, so there is a financial argument to say taking out additional mortgage borrowing now to spend/invest is nearly cost neural, and indeed if you 'lock' in the rate and spend all the money now and inflation ramps up you have gained assets. BUT this still assumes you have the capital to pay additional borrowing within a short period, otherwise you are actually worse off as mortgage borrowing is one of the most expensive forms of debt due the length of the loan even though the APR rates are low - Look at your mortgage account you will see anywhere between 20-40% of the payment every month you make is actually interest despite the headline figures of low APR rates, its legalised loan shark rates.

None of that applies to any form of car loan/financial products - HOWEVER if you really don't want to pay cash for some reason and want to keep the capital safe, additional mortgage borrowing to finance the car is almost certainly cheaper than any other form of borrowing, but with the plan to settle the entire balance in 3-5 years.