Upgrading your car? How to trade in and refinance seamlessly
Key takeaways
You can part exchange a car that is still on finance. The outstanding balance is settled first, usually by the dealer as part of the deal.
Compare your trade-in value against your settlement figure. If the car is worth more, the difference goes towards your next one. If less, you pay the shortfall.
Refinancing is the alternative if you want to keep your current car. It replaces your agreement with a new one on different terms.
Upgrading your car can feel like a big step, especially if you still have an existing finance agreement. But trading or refinancing a car and setting up a new deal can be more straightforward than you think.
To help clear up any questions, we've covered what trading in a car is, how part exchange works with car finance agreements, and if refinance could be a good option for you.
What is car part exchange?
Part exchange means swapping your current car for a new one at a dealership, with the value of your old car going towards the new one. It is also called trading in.
Instead of selling privately, you get a trade-in value from the dealer. That value either reduces the price of the new car or acts as a deposit on a new finance agreement.
Because it reduces the amount you need to borrow, part exchange usually means lower monthly payments on your next agreement.
How does part exchange work on a financed car?
Part exchange could be used alongside car finance agreements like Personal Contract Purchase (PCP) and Hire Purchase (HP). Here's how it works at the end of your agreement:
HP: If you've paid off the full amount of your HP agreement (including interest), you own the car outright. You could part exchange it and use its value as a deposit for a new car, with no remaining finance to settle.
PCP: If you don't want to own the car at the end of the PCP agreement, you have the option to part exchange it. If the car is worth more than the balloon payment, you can use it towards your next car. If the car is worth less than the balloon payment, you might have to pay the difference.
Can you part exchange a car on finance within your loan term?
Yes, you could part exchange a car on finance, but you need to settle any remaining finance first. If you want to part exchange during your loan term, it works a bit differently because you still owe money on the finance agreement. Here's how it works:
You request a settlement figure
A settlement figure is the amount of money needed to pay off the remaining balance on your car finance agreement early to trade your car in. If the value of your car is higher than the settlement figure, you could use the difference towards a deposit for your next car. But, if the car is worth less than what you owe, this is called being in negative equity, and you'll need to cover the difference.
There may be early termination fees
Depending on the terms of your contract, you might also face early termination fees for ending the agreement early. It's important to check first with your lender to make sure you factor these into the cost of part exchanging.
Check if you're in negative equity
If the trade-in value you're offered for your car is higher than the settlement figure, you'll be in positive equity. This is a good position to be in, because you could either keep the difference or use it as a payment towards your next car.
But, if the car's value is lower than what you owe, this is called negative equity, and you'll need to pay the difference - known as the shortfall. If you have negative equity, you may have a few options when part exchanging your car:
Roll negative equity into the new finance deal - If you start a new car finance agreement, you can sometimes carry over negative equity. This means the amount you still owe gets added to the finance for your new car. But, bear in mind that this could mean higher monthly payments on your new agreement.
Pay off the shortfall upfront - You could cover the negative equity directly by paying the difference to settle the finance. This allows you to start fresh with a new car finance agreement and not carry the debt over.
Hold off for now - If you're in negative equity, it could be wiser to hold off. You may want to wait until your car's value goes up or you've paid off more of the loan before trading it in. This could help reduce the negative equity.
It could be a good idea to get a quote from your finance provider and find out how much you'd owe before deciding to part exchange.
Car finance part exchange step by step
If you do decide to go ahead with part exchange in your loan term, here's some steps you could follow:
Check your finance terms - really important to check and understand the terms of your current finance agreement, including early repayment fees or settlement terms.
Get a settlement figure - Contact your lender to get the settlement figure, which is the total amount you'll need to pay.
Get a trade-in valuation - Ask your dealer to assess your car and give you a trade-in offer.
Check your equity status - If the trade-in offer is higher than the settlement figure, the extra value can go toward your new car. If it's lower, you'll need to settle the difference.
Set up a new finance deal - Once the dealer settles the outstanding finance, you can enquire about a car finance deal for your new car.
Is refinancing a better option for you?
Refinancing could be better if you want to keep your current car. Part exchange is usually better if you want to change it.
Refinancing replaces your existing agreement with a new one on the same car. It could lower your monthly payments, get you a better rate, or change how long you have left to pay.
It is worth considering if you are in negative equity and not ready to upgrade, because it buys you time to build equity before you trade in.
It’s also important to bear in mind that spreading the balance over a longer term can reduce the monthly payment but may increase the total interest you pay.
Refinance |
Part Exchange |
|
|---|---|---|
Your goal |
Keep the same car, but on new terms |
A different car on new terms |
Monthly payments |
Could lower payments with a lower APR or longer term |
Can vary based on the value of your old car, value of the new car and the new loan agreement |
Ownership |
Continue payments on new terms and own the car at the end |
You start the payment process from scratch on your chosen vehicle |
Equity impact |
Re-evaluates your loan balance against the car's current value |
Positive equity becomes your deposit, negative equity is paid off or rolled into the new deal |
The takeaway
Part exchanging your car could be a great way for you to upgrade your car without having to start from scratch. Whether your car's worth more or less than what you owe, you may have options if you want to trade your car in. Just be sure to check your contract and how much your car is worth before making a decision.
Disclaimer: The information in this guide is intended for general information purposes and is not intended as financial advice. When considering car finance options, it's important to review your individual circumstances and seek advice from a financial advisor.
Different lenders and finance providers may have different terms and conditions, so always read the fine print and speak with your lender about any potential fees, including early termination fees, settlement figures, or negative equity. Car Finance 247 does not offer financial advice and recommends contacting an advisor for personal guidance.