When Can a Consumer Early Settle a Personal Contract Purchase Agreement?

A Personal Contract Purchase (PCP) agreement is a type of car finance agreement that is popular in the UK. Under this agreement, the consumer pays a deposit and monthly instalments for a fixed term, typically between 2 to 4 years. At the end of this term, the consumer has three options:

1. Pay the final balloon payment to own the car outright

2. Return the car to the dealership without any further obligations

3. Enter into a new PCP agreement for another car

However, sometimes circumstances change, and the consumer may wish to settle the PCP agreement early. In this article, we will explore when a consumer can do so and what the implications are.

Early settlement is the process of paying off the remaining balance on a PCP agreement before the agreed term is up. This can be done in full or partially, which means paying off only a portion of the remaining balance. The main advantage of early settlement is that it can save the consumer money in the long run. This is because interest charges are calculated based on the remaining balance, and settling early means paying less interest.

However, not all PCP agreements allow for early settlement. It is important to check the terms and conditions of the agreement to see if early settlement is allowed and what the charges are. If early settlement is permitted, the charges will depend on the lender and the remaining period of the agreement.

If the agreement does allow early settlement, the consumer will need to contact the finance company to inform them of their intentions. The finance company will then provide a settlement figure, which will include the remaining balance and any early settlement charges.

The early settlement charges can be calculated in two ways:

1. Based on the interest due for the remaining period of the agreement

2. Based on a percentage of the outstanding balance

The charges can be quite high, so it is important to weigh up the savings against the charges before making a decision.

One important thing to note is that the Consumer Credit Act 1974 provides protection to consumers who wish to settle early. If the agreement was entered into after 1 February 2011 and the balance is over £10,000, the consumer has the right to request a reduction in the interest payable. This is known as the Half Rule, which means that the amount of interest payable is reduced by 50% of the total interest payable under the agreement.

In conclusion, early settlement of a PCP agreement can be a cost-effective way to end an agreement early. However, it is important to check the terms and conditions of the agreement and to understand the charges involved. If early settlement is permitted, the Consumer Credit Act 1974 provides protection to consumers who wish to settle early.