Can someone help me understand my options? (PCP and Negative equity)

StuMcBill

Hi, I'm about 2.5 years through my 4 year PCP deal on my Audi A4, and due to changing family circumstances since taking out the agreement, would like to change to something with a bit more boot space.  Spoke with Audi and I'm currently in £4k negative equity (which I presume I would nibble away at as I get closer to the end of my agreement).  So I was just wondering what my options would be at the moment and in the future.

1. Trade-in now, and carry the negative equity to a new deal, which would likely be prohibitively expensive.
2.  Wait till the end of my term, see how the figures look, and if favourable, trade-in.  Presumably I would get my guaranteed future value here, but if the car is still in negative equity, presumably the dealer will claw back the money somehow?
3.  If number 2 is not favourable, end PCP agreement and start fresh.
4.  Voluntarily terminate PCP deal in 8 months (when I would have paid off half the finance) and start fresh.
5.  Sell car privately and try and pay off finance.

Is there anything I'm missing, my current thought is to go down option 4, as this will get me a new car, for a non-prohibitively expensive price soonest, the fact that the A4 has gone through 3 facelifts since I bought mine makes me think that the figures in number 2 won't look too good.

Would appreciate some advice?

Thanks,
Stewart

AdrianC

1. Yes - you would be financing the purchase price of the new car PLUS the negative equity that has to be repaid to close this deal down.

2/3. If the car is anything but +ve equity at the end of the deal, simply hand it back to the financier (your option 3). If the car is in +ve equity, then trade it - effectively, the dealer pays the balloon, then credits the equity to your new PCP.

4. Yes. But, of course, you'll only be 10 months shy of the end of the contract. Remember that, while it won't "leave a black mark on your credit record", financiers do not like customers with a track record of using legislative loopholes to get out of contracts early.

5. If it's in -ve equity (and it will be), then why would you do that?

Where are you with mileage compared to your pro-rata'd contract? How unworkable is the boot space issue?

neilmcl

AdrianC said:

5. If it's in -ve equity (and it will be), then why would you do that?

His negative equity would be in reference to the trade value of the car rather than what he could get selling privately, which may or may not be closer to his current settlement figure.

@StuMcBill have you actually got a settlement figure from Audi finance?

StuMcBill

AdrianC said:

1. Yes - you would be financing the purchase price of the new car PLUS the negative equity that has to be repaid to close this deal down.

2/3. If the car is anything but +ve equity at the end of the deal, simply hand it back to the financier (your option 3). If the car is in +ve equity, then trade it - effectively, the dealer pays the balloon, then credits the equity to your new PCP.

4. Yes. But, of course, you'll only be 10 months shy of the end of the contract. Remember that, while it won't "leave a black mark on your credit record", financiers do not like customers with a track record of using legislative loopholes to get out of contracts early.

5. If it's in -ve equity (and it will be), then why would you do that?

Where are you with mileage compared to your pro-rata'd contract? How unworkable is the boot space issue?

With regards to number 4, I've been reading about that, but surely its not a legislative loophole if its clearly stated in your contract that it is within your rights?
I'm pretty much bang on with mileage (I was quite a bit above, but then COVID hit and I have been working from home.  Its not totally unworkable, but its a major PITA.

neilmcl said:

AdrianC said:

5. If it's in -ve equity (and it will be), then why would you do that?

His negative equity would be in reference to the trade value of the car rather than what he could get selling privately, which may or may not be closer to his current settlement figure.

@StuMcBill have you actually got a settlement figure from Audi finance?

Yeah, I automatically got one sent to me once Audi queried my finance with Audi Finance.  I haven't looked into a private sale yet though.  

Petriix

Voluntarily termination (I believe) includes the balloon payment so it's not normally a cost effective option and it certainly won't work in your favour. You just need to weigh up whether you want to settle the finance now (either by selling the car or trading it in) or wait until the end of the agreement. MG are currently offering £4000 off an MG5 EV (in addition to the trade in value) when you trade in any petrol or diesel car, so that's an option.

neilmcl

Petriix said:

Voluntarily termination (I believe) includes the balloon payment so it's not normally a cost effective option and it certainly won't work in your favour. You just need to weigh up whether you want to settle the finance now (either by selling the car or trading it in) or wait until the end of the agreement. MG are currently offering £4000 off an MG5 EV (in addition to the trade in value) when you trade in any petrol or diesel car, so that's an option.

Do you actually understand what a VT is?

AdrianC

StuMcBill said:

AdrianC said:

4. Yes. But, of course, you'll only be 10 months shy of the end of the contract. Remember that, while it won't "leave a black mark on your credit record", financiers do not like customers with a track record of using legislative loopholes to get out of contracts early.
...
Where are you with mileage compared to your pro-rata'd contract?

With regards to number 4, I've been reading about that, but surely its not a legislative loophole if its clearly stated in your contract that it is within your rights?

It's not just "stated in your contract" - it is written into the law that you have to be able to do it. It's an early escape route that the financier have no say over.
https://www.legislation.gov.uk/ukpga/1974/39/section/100

I'm pretty much bang on with mileage (I was quite a bit above, but then COVID hit and I have been working from home. 

That might point towards one of the early-termination options, then, if the mileage is likely to rise again once the current situation is back in its box, if you go back to your previous commute patterns and the mileage starts to outstrip the contract again.

Petriix

neilmcl said:

Petriix said:

Voluntarily termination (I believe) includes the balloon payment so it's not normally a cost effective option and it certainly won't work in your favour. You just need to weigh up whether you want to settle the finance now (either by selling the car or trading it in) or wait until the end of the agreement. MG are currently offering £4000 off an MG5 EV (in addition to the trade in value) when you trade in any petrol or diesel car, so that's an option.

Do you actually understand what a VT is?

Yes, I do. Do you?
See: https://www.thecarexpert.co.uk/car-finance-voluntary-termination-pcp-hp/

The Total Amount Payable is the total amount borrowed plus interest and fees. It also includes the Guaranteed Future Value (GFV) on a PCP. This means that you usually don’t reach the voluntary termination point until very late in a PCP agreement. It is not simply the halfway point of your agreement, as that is unlikely to be anywhere near the 50% repayment point on a PCP.

Petriix

... For example:
Total initial cost (after deposit) £20,000.
Interest 5%
Term 48 months
GFV £8000
Monthly payments £309.68
Total interest payable £2864.64
Voluntary termination threshold £11,432.32
That's 37 months before you can invoke voluntary termination. It might make sense if you're still in significant negative equity inside the last few months of the agreement, but it's only possible later on.

neilmcl

Petriix said:

... For example:
Total initial cost (after deposit) £20,000.
Interest 5%
Term 48 months
GFV £8000
Monthly payments £309.68
Total interest payable £2864.64
Voluntary termination threshold £11,432.32
That's 37 months before you can invoke voluntary termination. It might make sense if you're still in significant negative equity inside the last few months of the agreement, but it's only possible later on.

And explain why "it's not normally a cost effective option and it certainly won't work in your favour"?

Also you can invoke a VT any time you like, you simply have to make your liability of 50% of the total amount payable. 

Petriix

neilmcl said:

Petriix said:

... For example:
Total initial cost (after deposit) £20,000.
Interest 5%
Term 48 months
GFV £8000
Monthly payments £309.68
Total interest payable £2864.64
Voluntary termination threshold £11,432.32
That's 37 months before you can invoke voluntary termination. It might make sense if you're still in significant negative equity inside the last few months of the agreement, but it's only possible later on.

And explain why "it's not normally a cost effective option and it certainly won't work in your favour"?

Also you can invoke a VT any time you like, you simply have to make your liability of 50% of the total amount payable. 

Where the GFV is lower than the value of the vehicle you're better off settling the PCP by selling the vehicle for its true value and pocketing the profit. If the GFV is too high then you ultimately profit by seeing out the PCP then handing the car back having paid less than the depreciation to 'own' it.

Depending on the deposit and interest rate, you might not hit the 50% threshold at all during the agreement or it may be so close to the end that it makes minimal difference. Sure, there are some (fairly uncommon) circumstances in which VT might work out marginally cheaper, but that would be the exception rather than the rule.