Ending PCP agreement by paying it off/closing it versus making lump sum payments against it first

[turnitdown]

I owe VWFS about £55,000, which I've been planning to pay off more or less now (got the van a month ago). This will cost me about £750 in interest as a penalty. I notice though that it seems to be an option to throw lump sums at your PCP agreement. The website reads:

"If you have a PCP, Hire Purchase or Lease Purchase agreement you may be able to make a partial payment towards your agreement to reduce the monthly rentals or shorten the term of the agreement. If permitted you can do this as often as you wish, however the minimum the monthly rental can be reduced to is £50.00 and the minimum the term remaining can be reduced to is 1 month.

Once the payment is made the finance agreement will be re-calculated and confirmation will be sent in the post."

I'm wondering if this means that I could pay some large chunk, e.g. £20k, against the agreement a couple of times, reducing the amount owing to some small number (so the 3 months interest penalty is trivial) or bringing the agreement to a close within one or two months (if I don't pay it off early). Has anyone tried doing something like this?

It seems too obvious a way to avoid a 3-month interest penalty for it to be permitted, but I don't see how it isn't given that wording.

 

[Mansfieldman750]

I owe VWFS about £55,000, which I've been planning to pay off more or less now (got the van a month ago). This will cost me about £750 in interest as a penalty. I notice though that it seems to be an option to throw lump sums at your PCP agreement. The website reads:

"If you have a PCP, Hire Purchase or Lease Purchase agreement you may be able to make a partial payment towards your agreement to reduce the monthly rentals or shorten the term of the agreement. If permitted you can do this as often as you wish, however the minimum the monthly rental can be reduced to is £50.00 and the minimum the term remaining can be reduced to is 1 month.

Once the payment is made the finance agreement will be re-calculated and confirmation will be sent in the post."

I'm wondering if this means that I could pay some large chunk, e.g. £20k, against the agreement a couple of times, reducing the amount owing to some small number (so the 3 months interest penalty is trivial) or bringing the agreement to a close within one or two months (if I don't pay it off early). Has anyone tried doing something like this?

It seems too obvious a way to avoid a 3-month interest penalty for it to be permitted, but I don't see how it isn't given that wording.

I’m not Martin Lewis but I’ll have a bash.
Firstly you can’t be charged 3 months interest if you settle, it’s 58 days maximum.
But that’s not the main thing which is what interest you are paying and what interest you can get elsewhere if you put the money to use elsewhere instead of paying off the van.
In other words if you are paying say 6% interest and you can’t get 6% interest risk free anywhere ( you can’t ! ) then pay off the van if you can afford to do so. All of it.
But if you have the van at say 3% ( you haven’t or 3 months interest wouldn’t be £750 )
then you can get more than 3% risk free so it wouldn’t be financially beneficial to pay it off.
( but it might give you a good feeling knowing it belonged to you not VW finance )
At the end of the day only you can decide.

 

[Gecko_Bioyag77]

If you request a settlement figure from VWFS you will be able to make an informed decision as it will include any settlement charges, interest etc.

 

[turnitdown]

I’m not Martin Lewis but I’ll have a bash.
Firstly you can’t be charged 3 months interest if you settle, it’s 58 days maximum.
But that’s not the main thing which is what interest you are paying and what interest you can get elsewhere if you put the money to use elsewhere instead of paying off the van.
In other words if you are paying say 6% interest and you can’t get 6% interest risk free anywhere ( you can’t ! ) then pay off the van if you can afford to do so. All of it.
But if you have the van at say 3% ( you haven’t or 3 months interest wouldn’t be £750 )
then you can get more than 3% risk free so it wouldn’t be financially beneficial to pay it off.
( but it might give you a good feeling knowing it belonged to you not VW finance )
At the end of the day only you can decide.

yes, I want to pay it off and am going to. What I'm wondering though is whether one can avoid an interest penalty by simply making a lump-sum payment to reduce the principal on which the interest penalty would be calculated when one does pay it off. It seems like you can from what I quoted but that seems like such an obvious way to avoid a penalty that it's hard to believe.

Example:

£55k at 6.9% interest: £10.40 interest a day, so roughly £623 for 2 months as a penalty.

Suppose instead I pay £50k as a lump sum, to reduce the monthly payment and/or the term of the loan. Then, say, a week later I pay the £5k off and close the account. 6.9% interest on £5k is less than £1 a day, so the penalty would be under £60.

 

[Mansfieldman750]

yes, I want to pay it off and am going to. What I'm wondering though is whether one can avoid an interest penalty by simply making a lump-sum payment to reduce the principal on which the interest penalty would be calculated when one does pay it off. It seems like you can from what I quoted but that seems like such an obvious way to avoid a penalty that it's hard to believe.

Example:

£55k at 6.9% interest: £10.40 interest a day, so roughly £623 for 2 months as a penalty.

Suppose instead I pay £50k as a lump sum, to reduce the monthly payment and/or the term of the loan. Then, say, a week later I pay the £5k off and close the account. 6.9% interest on £5k is less than £1 a day, so the penalty would be under £60.

No you can’t do it. You have a contract. You have to make a final or balloon payment in 3, 4 or 5 years time, depending on the length of the agreement.
If you were to pay £50,000 now, VW Finance would be paying YOU every month in order to reach the final payment amount several years from now.
Everyone would go to jail for money laundering.

Stick to your original plan and settle the agreement. Take it on the chin if it costs you a couple of months interest. You are in a contract at 6.9% when inflation is running at 1.9%.
The sooner you get out of it the better.

When you get a settlement figure the figure will be valid until a certain date. If you have a direct debit payment going out before that date it will still go. Don’t worry, you will get it back, or at least some of it. Anyway that’s all explained in the letter you will get when you request a settlement figure.

Changing the subject completely, I just saw your munro bagging photos. Keep it up and enjoy your van !

 

[turnitdown]

If I understand you correctly, the idea is that the contract locks in a balloon payment at the end of the term, so although I could make a lump sum now to reduce the amount due monthly, or the term, I couldn't make a lump sum payment that would wipe out the balloon payment. If that' the case, then yes, I can see how/why I couldn't make a £50k payment now. (I should still be able to make a lump sum payment to reduce the monthly payment to the minimum. That would then reduce the total owing. That would then reduce the interest penalty, whatever it is, which must be calculated on the total owing. But that's too much hassle for a minor savings.)

I had intended to pay cash for the van but I had to close before I could transfer money from overseas. So I just did the PCP route intending to pay it off promptly.

 

[WelshGas]

If I understand you correctly, the idea is that the contract locks in a balloon payment at the end of the term, so although I could make a lump sum now to reduce the amount due monthly, or the term, I couldn't make a lump sum payment that would wipe out the balloon payment. If that' the case, then yes, I can see how/why I couldn't make a £50k payment now. (I should still be able to make a lump sum payment to reduce the monthly payment to the minimum. That would then reduce the total owing. That would then reduce the interest penalty, whatever it is, which must be calculated on the total owing. But that's too much hassle for a minor savings.)

I had intended to pay cash for the van but I had to close before I could transfer money from overseas. So I just did the PCP route intending to pay it off promptly.

I paid for my new Multivan using VWFS for about £19,500 of the price at end of October. Registered on the VWFS site. Clicked the final settlement button. The settlement did not include any Interest etc. Requested payment details, which were sent in email , Paid.
Text 48hrs later to confirm payment receipt ( payment made Friday pm and text received Monday pm ) letter to confirm transfer of ownership within 10 working days.

 

[Kernowboy]

I have certainly paid off large lump sums in the past and been given the option to either reduce the term or reduce the monthly payment. Opt for the latter and I don’t see why your plan wouldn’t be effective.
I have never had to pay a 3 month interest penalty though, having done it a number of times including in the last 12mths - perhaps that’s a new thing once you are out of the 14 day cooling off period where certainly no interest penalty is payable.

 

[Mansfieldman750]

I paid for my new Multivan using VWFS for about £19,500 of the price at end of October. Registered on the VWFS site. Clicked the final settlement button. The settlement did not include any Interest etc. Requested payment details, which were sent in email , Paid.
Text 48hrs later to confirm payment receipt ( payment made Friday pm and text received Monday pm ) letter to confirm transfer of ownership within 10 working days.

Were you inside the 14 day cooling off period ?

 

[WelshGas]

Were you inside the 14 day cooling off period ?

Yes, but 8 days before 1st repayment.

 

[Mansfieldman750]

If I understand you correctly, the idea is that the contract locks in a balloon payment at the end of the term, so although I could make a lump sum now to reduce the amount due monthly, or the term, I couldn't make a lump sum payment that would wipe out the balloon payment. If that' the case, then yes, I can see how/why I couldn't make a £50k payment now. (I should still be able to make a lump sum payment to reduce the monthly payment to the minimum. That would then reduce the total owing. That would then reduce the interest penalty, whatever it is, which must be calculated on the total owing. But that's too much hassle for a minor savings.)

I had intended to pay cash for the van but I had to close before I could transfer money from overseas. So I just did the PCP route intending to pay it off promptly.

That’s my reading of it. I’m not at home to check my own agreement but Google says you can reduce the term on HP but not PCP.

 

[Mansfieldman750]

Yes, but 8 days before 1st repayment.

There wouldn’t be any charges then.

 

[RoB5urf]

I paid off my VW finance early with no penalty - the settlement figure was less than the sum of the remaining payments. Compared to you I was further into the agreement and the lump sum was smaller at ~£20K if memory serves, but I would have the thought the same rules around penalties still apply.

 

[turnitdown]

The settlement letter I received from VW doesn't have any breakdown or information about where the settlement number comes from, but eyeballing the math it seems like it must include an interest penalty. The original amount of credit was £53,969. I've had the van 47 days, the settlement letter says I have to pay the settlement amount by Dec 16th, meaning if there is no penalty I should be paying interest on between 47 days and 73 days. At 6.9% that's between £479 and £744. I've made one payment of £476, and the settlement figure is £54,551. If I pay that I'll have paid a total of £55,027 to VWFS, against an initial loan plus interest of between £54,448 (47 days interest) and £54,713 (73 days interest. So somewhere between £314 and £579 interest.

Looking at that, I bet it's calculated this way: 47 days interest because I gave them notice, plus 58 days penalty. The 58 days equals £579.

Weirdly the contract itself doesn't say anything about a prepayment penalty.

 

[Mansfieldman750]

The settlement letter I received from VW doesn't have any breakdown or information about where the settlement number comes from, but eyeballing the math it seems like it must include an interest penalty. The original amount of credit was £53,969. I've had the van 47 days, the settlement letter says I have to pay the settlement amount by Dec 16th, meaning if there is no penalty I should be paying interest on between 47 days and 73 days. At 6.9% that's between £479 and £744. I've made one payment of £476, and the settlement figure is £54,551. If I pay that I'll have paid a total of £55,027 to VWFS, against an initial loan plus interest of between £54,448 (47 days interest) and £54,713 (73 days interest. So somewhere between £314 and £579 interest.

Looking at that, I bet it's calculated this way: 47 days interest because I gave them notice, plus 58 days penalty. The 58 days equals £579.

Weirdly the contract itself doesn't say anything about a prepayment penalty.

I agree.
Another way of doing the sum is like this :
You worked out the interest to be £10.41 per day earlier.
You are on day 47.
47 x £10.41 = £489.27 accumulated interest.
You made one payment of £476.
If there were no charges you might expect the settlement figure to be ( £53,969 + £489.27 ) - £476 = £53,982.27
But in fact it is £54,551.
£54,551 - £53,982.27 = £568.73 or 54.63 days interest.
Close enough.

Look at it from VWFS side. They helped you facilitate the purchase when you were abroad. Now they’ve lost all that lovely 6.9% interest they were going to make from you.
I think they are entitled to sting you for a couple of months interest. Fairs fair.

Anyway wish you luck with the van. Don’t change your mind ! Get it done.

 

[turnitdown]

Look at it from VWFS side. They helped you facilitate the purchase when you were abroad. Now they’ve lost all that lovely 6.9% interest they were going to make from you.
I think they are entitled to sting you for a couple of months interest. Fairs fair.

oh yes, I don't mind paying a couple of month's interest, if that's what's required. That was always the plan. I just thought if their own policies gave a route to paying much less, it was worth doing that.

Will be paying it off this morning. The interest rate is the main driver, but there's also a limit of 6000 miles a year and I've already gone 2500.

 

[2haw]

The 6000 miles per year is only a calculation to work out the final balloon payment if you were to give it back to VW and walk away. It doesn’t mean you can only do 6000 a year.

 

[dspuk]

The 6000 miles per year is only a calculation to work out the final balloon payment if you were to give it back to VW and walk away. It doesn’t mean you can only do 6000 a year.

Yup. I always get my PCP set to the lowest milage as I never intend to hand cars back. That way I get the smallest monthly because the balloon is higher. Then at the end I just pay the settlement figure. Never been in a position where I have lost out and you never would on a Cali because residuals are always so strong.

 

[Mehdime]

Yup. I always get my PCP set to the lowest milage as I never intend to hand cars back. That way I get the smallest monthly because the balloon is higher. Then at the end I just pay the settlement figure. Never been in a position where I have lost out and you never would on a Cali because residuals are always so strong.

Since it might not be obvious to all: worth pointing out that asking for a low mileage to increase the guaranteed final value (the balloon payment) will indeed decrease the monthly payments but will also *increase* the amount of interest you’ll pay over the course of the PCP (since you’ll be paying interest on a larger amount of borrowing through the course of the PCP).

 

[2haw]

Yup. I always get my PCP set to the lowest milage as I never intend to hand cars back. That way I get the smallest monthly because the balloon is higher. Then at the end I just pay the settlement figure. Never been in a position where I have lost out and you never would on a Cali because residuals are always so strong.

In the past, I’ve done the exact opposite. I only do around 8k a year but setting the mileage higher increases the monthlies and reduces the final payment.

 

[dspuk]

In the past, I’ve done the exact opposite. I only do around 8k a year but setting the mileage higher increases the monthlies and reduces the final payment.

Horses for courses I guess - I'm happy to minimise my monthly cost knowing the end RV will generally be higher and as I've always drop a healthy depossit on any vehicle works out for me.

The maths the same either end though, as you point out.

Also note the point made by @Mehdime ref interest although one suspects the result of that is minimal, but I've not done the math.

 

[turnitdown]

The 6000 miles per year is only a calculation to work out the final balloon payment if you were to give it back to VW and walk away. It doesn’t mean you can only do 6000 a year.

The wording in the contract makes it seem like there is an excess charge of 7.2p per mile, regardless of whether you turn the vehicle back over to VW (they own it the whole time). That is, it says there is that charge, and it's not said to be conditional on turning the vehicle back over.

I guess one could say 'but how would they know it has excess miles if I end up keeping it?', which is fair enough, except they are also allowed to inspect the vehicle whenever they want. If it drove 25,000 miles more than allotted, by not checking the mileage even when people do make the balloon payment, they would be leaving £1800 on the table.

 

[Agnes_Cali]

I never heard or VWFS checking someone's miles on PCP if the person was settling the contract. They are only interested when someone does VT and then can charge the extra for excess miles.

I'm on PCH, which is different and also chose 6000 miles pa and I just plan to drive as many miles as I can and pay excess when returning vehicle. 7.2p is cheap and I guess their fee based on engine size is a bit flowed, because it doesn't correspond with depreciation. I paid excess miles fee on every vehicle I had on PCH from VW.

 

[larrylamb]

I guess one could say 'but how would they know it has excess miles if I end up keeping it?', which is fair enough, except they are also allowed to inspect the vehicle whenever they want. If it drove 25,000 miles more than allotted, by not checking the mileage even when people do make the balloon payment, they would be leaving £1800 on the table.

Annual service would show a record of mileage.

 

[Agnes_Cali]

But they don't ask about it. It's not that they can't check mileage, they are not interested in it if you settling the payment.