Nell enters the curiosity shop with a dwarfed man named Daniel Quilp, a shady character whose presence embarrasses the grandfather. Quilp asks about the identities of the others present. It turns out that Nell, on the night she got lost, was coming from Mr. Quilp’s house.
Fred asks Nell if the grandfather has been teaching her to hate him, which she denies. She says nobody ever mentions Fred, and that she has a great affection for him that will never change—but she would love him more if he didn’t vex the grandfather. Fred asks Mr. Quilp if he knows their grandfather well and is a party to his secrets, which Mr. Quilp confirms. He tells Quilp to tell his grandfather that he will come to visit Nell as often as he pleases, and the only way to be rid of him is to be rid of Nell too. He states that the grandfather believes he doesn’t have genuine affection for Nell, but he does desire that she knows of his existence. He is about to leave when Swiveller stops him. Swiveller addresses Quilp, saying he came believing the grandfather was friendly and to help resolve the quarrel with his grandson. He tells Quilp that the only way to resolve this is for the grandfather to hand over some money. Swiveller and Fred exit.
Quilp tells the grandfather he shouldn’t acknowledge his relations. The grandfather says he doesn’t know what he can do about it, except to resort to violence—which he figures is Mr. Quilp’s solution. Quilp agrees, saying people should ask his timid and obedient wife.
Quilp hands the grandfather some money, saying he didn’t trust the heavy burden to Nell—though she should get used to carrying the load when he dies. The grandfather is putting the money into an investment that he refuses to mention to anyone. He seems rather dejected when he locks the money in the safe, which Quilp notices. Quilp takes his leave, saying his wife will worry with his long absence.
The Narrator is planning on leaving also, but the grandfather pleads with him to stay—which the Narrator gladly does, hoping to satisfy his still burning curiosity. He muses, as Nell joins them, what will happen to her when the grandfather dies. The grandfather says he prays good fortune will befall her. He tells her he regrets that she has lived apart from friends of her own age, in solitude apart from everyone except him. She denies that he has deprived her. He tells the Narrator he never did it intentionally—but he always hoped that a brighter future was near. He sends Nell out to greet Kit, and she hugs him before going away crying.
Grandfather tells the Narrator he has been considering what the other said to him the night before. Everything he has done, he has done for Nell’s sake. He can’t withdraw from whatever he is involved in now, but he still hopes for success. He wants to spare Nell the poverty he and her mother had suffered, which had sent the mother to a premature death. He promises Nell will have a fortune. He says no more when she returns. The Narrator assumes that the grandfather is wealthy, but that he is one of those people that always fears poverty.
Nell gives Kit a writing lesson. The grandfather grows increasingly agitated before he finally quits the house at the same hour he did the night before, going out and leaving the little girl alone.
At this point, the Narrator claims that he is detaching himself from the story—which will be narrated in the third person so that the reader can form their own opinions.