A part exchange with finance outstanding still belongs to the finance company. Get a written settlement figure, pay it to the finance company yourself, and make sure the buyer understands what is left of their allowance. Skipping any of these steps leaves the risk with you.
A good share of the part exchanges that arrive on a UK forecourt are still on finance. Hire purchase and PCP are how many private buyers fund a vehicle, and plenty of them want to change before the agreement has run its course.
Until the agreement is settled, the vehicle belongs to the finance company. The customer is the registered keeper and drives it every day, but they cannot pass on ownership they do not have. A dealer who takes the vehicle in without settling the finance can see the finance company claim it back, from the forecourt or from the next buyer.
Why the trade is not protected
Part III of the Hire Purchase Act 1964 protects a private purchaser who buys a vehicle on hire purchase or conditional sale in good faith, without notice of the agreement: they get good title. Motor dealers are excluded from that protection. As a trade purchaser, you cannot rely on not having known.
That makes the check your job. Ask the customer directly, record their answer in writing, and run a provenance check that shows outstanding finance before you agree the deal. The V5C will not tell you: it records the registered keeper, not who owns the vehicle.
Get the settlement figure in writing
The figure that matters is the settlement, the amount the finance company will accept to close the agreement on a given date. It is not the same as the remaining payments, and it changes from day to day.
Ask for the settlement figure in writing, with the date it is valid until. Finance companies give it to the customer, and to the dealer with the customer's consent. Agree the deal against that figure, and if completion slips past the date, ask for a new one.
File the settlement letter with the deal. If anyone asks later what was paid and why, the answer is on paper.
Pay the finance company, not the customer
The settlement is paid by the dealer directly to the finance company, out of the part exchange allowance. Paying the customer and trusting them to clear the agreement leaves the vehicle on finance in your stock until they do.
Example: your customer buys a vehicle at £17,995 and part exchanges their current one. You agree an allowance of £5,750. Their settlement figure is £1,850. You pay £1,850 to the finance company, and the remaining £3,900 counts towards the new vehicle, so the customer has £14,095 left to pay.
Keep proof of the payment and wait for the finance company to confirm the agreement is closed before you sell the part exchange on.
When the settlement is bigger than the allowance
Sometimes the customer owes more than the vehicle is worth. The difference, negative equity, does not disappear when the vehicle changes hands. The customer has to pay it, either in cash or, where a lender agrees, added to the finance on the new vehicle.
Make the numbers visible to the customer. Show the allowance, the settlement and the difference side by side, in writing, before anyone signs. A buyer who only discovers the negative equity at the paperwork stage is a buyer who walks away, or comes back with a complaint.
The paperwork that closes the loop
A clean part exchange with finance leaves four things on file: the customer's declaration about finance, the settlement letter, proof of payment to the finance company, and the deal itself showing allowance, settlement and balance. The V5C and the keys complete the set.
With these in place the part exchange is ordinary stock. You can prepare it, advertise it and sell it like any other vehicle, knowing that no one else has a claim on it.
