You never know what the future has in store and often you’ll want or need to settle your PCP motorcycle finance before the end of the term. Terminating the agreement and settling early is entirely possible but it’s likely it’ll cost you a lump sum to do so.
If you’ve already repaid 50% of your PCP (or indeed HP) finance agreement then you can call into action the Voluntary Termination clause. You’ll sign the bike back to the dealer and you won’t have to make any more monthly payments. Often this will work out relatively expensive as you’ll ‘lose’ your deposit and will more than likely be less than halfway through your term when you have paid off 50% of the finance.
If your motorcycle cash price is £10,000 and the total finance amount including administrative fees is £11,000 then your 50% mark is £5,5500. If you’ve paid back £5,000 of the finance then you’ll have to find another £500 to meet the 50% minimum payment before the bike can be signed back over to the dealer or finance company. If you’ve already paid back more than 50% of the loan and you invoke VT then you won’t be entitled to any money back.
Let’s say you buy a £10,000 motorcycle with a PCP finance agreement over a 36-month (3 year) term. We’re not factoring in interest or a deposit – both of which will be a part of the majority of PCP deals and will vary in amount.
So we have a £10,000 motorcycle, with £10,000 finance owing.
The finance company (via the dealer or manufacturer) will calculate the value of the bike at the end of your 3-year term. This is called the Guaranteed Minimum Future Value (GMFV). The GMFV is subject to a few terms, often these are the most common:
Let’s say your GMFV is set at £5,500. During your 3-year PCP term you’re paying the depreciation of the bike, from £10,000 to £5,500, i.e. you’ll repay £4,500 over 3 years. That’s called capital repayment. If you want to keep the bike at the end of this term you’ll have to pay the £5,500 GMFV, often referred to as ‘balloon payment’.
In our example the depreciation is £4,500 over 3 years or £1,500 per year. However this ‘straight line’ of depreciation isn’t what the real world depreciation looks like.
In the first year your bike will depreciate very quickly, let’s say it loses £3,000 in value, then in year 2 it loses £1,000 and by the end of year 3 it has lost another £500.
If you want to settle your PCP at the end of Year 1, the bike will ‘only’ be worth £7,000 and yet you’ll have paid off £1,500 in finance so you’ll have £1,500 of negative equity. This is the difference between what your bike is actually worth and what you owe to the finance company.
The finance companies and dealers are incredibly good at forecasting your bike’s value and setting the GMFV, so if you terminate your agreement you’ll still pay off the depreciation and you won’t have access to the bike.
This is a very simple example and your bike’s real value will be affected by a lot of other factors, some of which are out of your control – the mileage, condition and market value. Carefully study the terms of the GMFV in your agreement as it may have drastic consequences on the actual future value.
Generally speaking the lower your deposit and the higher the APR (interest) charges, the more negative equity you’ll be in for the duration of your agreement and the sooner you end your agreement, the more you’ll have to fork out.
If you go into a PCP agreement with a view of settling early then we’d advise caution. It may be a better idea to get a loan instead as you’ll otherwise have to pay a substantial cash sum to settle a PCP contract before term and you may not have access to that lump sum.
Carefully consider the motorcycle you’re buying and whether it will suit your long-term needs – if you need to switch to another bike half-way through your PCP term, you won’t be in a strong position to drive a hard bargain.