Car Finance Glossary
Trying to understand car finance can be confusing, especially with all of the car finance jargon involved which can be difficult to make sense of. Car dealers can prey on the confusion of their buyers and make them think they’ve got a top-quality deal when really, that isn’t the case. If you would like to fully understand as much as you can about car finance before purchasing a loan, read Car Finance Plus’ car finance glossary for all of the information you need.
Read on to see all of our car finance jargon:
This is a contract between a lender and a borrower which is legally binding and sets out the payment schedule for the loan the borrower is receiving. It shows the exact interest, fees and charges, as well as both sides rights and responsibilities. You should always make sure you are 100% confident you know what you are signing and are willing to be legally bound by all of its terms and conditions.
An acceptance rate is how many applications for a loan have been approved and payed by the lender. The higher the brokers acceptance rate, the more likely you are to be approved for a loan.
This stands for Annual Percentage Rate. It is an overall figure which shows the annual cost for borrowing the money and allows you to compare different finance offers so that you understand the total cost for borrowing the money.
This is a word you will hear when you are behind on your payments. If you are ‘in arrears’, you are behind your payment schedule and will have to pay extra in order to get back on track to the agreed plan.
A net amount, after all payments and charges have come out of your account.
A lump sum payment that is paid at the end of some financing agreements. This allows you to take ownership of the car and the amount is agreed at the start of the agreement.
This is the rate of interest set by the Bank of England and determines the lowest rate the lenders will charge interest at.
A conditional loan is when you agree to buy a car at the beginning of the finance agreement, which means that once you have paid your monthly repayments, the vehicle is yours.
This is the record of the credit you have taken out and your repayment of debts. It typically includes credit from banks, credit card companies, governments etc.
This is a long-term rental agreement which is the same as renting a car for a day or a week. You do not own the car; it remains the property of the finance company at all times. At the end of the agreement, the car goes back to the finance company, just like a rental car.
To default on your agreement means to miss a scheduled payment. Defaulting on your agreement is a breach of your contract and means that the finance company can take action against you if they wish to do so. Most companies will not take action if you are able to make up your arrears.
When taking out car finance you sometimes have the option to put down a lump sum at the start of a contract. A deposit is only usually refundable if the contract cannot go ahead.
The amount of money that your car loses as a result of VAT, age, mileage, wear & tear and other factors. The value of your car after depreciation is called the residual value.
Once all of the debts related to your car have been paid off, it then becomes equity because it is now an asset that you own. Negative equity means your car is worth less than what you owe, so there is a shortfall that needs to be paid off in order to sell or part-exchange the vehicle.
Certain types of finance agreement will have a mileage allowance for the total duration of the term. You may be charged if you exceed this limit.
This is a set interest which remains unchanged throughout the term of the finance agreement.
The percentage you repay the finance company over and above the money you are borrowing. Dealers often refer to the flat rate instead of the APR because it’s often lower, so make sure you are not duped.
The Financial Conduct Authority. An independent body that regulates financial services in the UK, ensuring consumers get a fair and honest deal.
Financial Services Authority. The predecessor of the FCA. Some dealers and finance advisors may still refer to the FSA out of habit, but all written information must be up to date with appropriate references to the FCA.
This stands for the Guaranteed Asset Protection. This is a type of insurance which covers the difference between the original cost of the car and its value when written-off or stolen.
A guarantor is a person that acts as a guarantee of payment, for example a relative may guarantee they will pay your loan should you not be able to but means you can be putting someone you trust in to a sticky situation if you decide not to make any payments.
The Hire Purchase is a popular form of finance agreement. The interest rate is fixed for the full term, and the amount borrowed is spread equally into monthly payments until the Total Amount Payable is repaid.
This is the price added on top of the money you borrow. Interest rates often rely on your credit history. This is different to a fee, which is payable in one lump sum.
This is an increase in prices and fall in purchasing value of money.
It’s possible to apply and sign a finance agreement with two or more people. Together, they are responsible for repaying the loan or finance agreement.
A lease purchase is a contract where you own the vehicle, making several monthly payments at the beginning of the agreement and pay a large payment (balloon) at the end of the deal. The deferred payment will depend on the age and mileage of the car as the contract comes to a close.
Lease purchase is one of the least popular contracts people in the UK go for. However it can be beneficial if you are looking to purchase a luxury car as the value of the vehicle will not depreciate over time. You also can avoid any upfront fee and have ownership over the car after the balloon payment is made.
A contract between a lender and yourself where they come to an agreement regarding the setup of the loan.
The period you have to repay your loan.
The process of preserving the car in the best possible condition. Often lease agreements give a buyer the choice to add servicing costs as another monthly payment. Overall, the total costs of spending will increase but spreads the servicing costs over time and avoids you from making a large sum of payment when your car requires servicing.
You are entitled to a mileage allowance if you have your own vehicle and use it for business journeys. However, you cannot qualify for mileage allowance if you use a company car. The total payment of mileage allowance is determined how old the vehicle is and how many miles they used. Be warned that you will be charged a penalty fee of around 10 – 20 pence per mile that you exceed the mileage allowance.
Negative equity is where the car is worth less than the value you owe to the finance company – also referred to as an “upside down” loan. Despite selling your vehicle, you are unable to pay off the remaining loan amount. For example, if the loan is settled at £10,000 but your car is only worth £7,000, you have £3,000 negative equity.
Negative equity can occur when the car is losing its value at a faster pace than you are able to repay the loan. The finance company may detect a flaw in the car, causing the value to fall rapidly.
The total compulsory cost you pay to use your brand new car on the road. The total price includes the delivery fees, vehicle registration fee, cost for printing your number plates, and road tax. The first year cost of the road tax depends on how much CO2 the new vehicle emits.
Option to Purchase Fee
The option to purchase fee is the remaining balance you need to pay at the end of the contract to gain full ownership of the vehicle. Once the fee is made, the vehicle ownership transfers from the finance company to the customer.
In addition to the regular monthly payments, you have a choice to make extra payments to the financial plan. The benefits of making an overpayment each month is that the Total Amount Payable is reduced and/or the Term length is shortened and/or your Monthly Payment amounts will decrease.
Please keep in mind that several finance companies may charge a penalty fee if you opt for this payment method.
A personal loan is a type of unsecured loan. With this loan, you are able to borrow money to purchase a car. If you stop making payments in monthly instalments, the finance company cannot take your car. However you may face severe consequences of damaging your credit rating or bankruptcy.
Personal Contract Purchase (PCP)
In the UK, The Personal Contract Purchase, also referred as a ‘Personal Contract Plan’, is a very common approach for individuals to finance a new or used car. You repay the depreciation of the car, and will not need to repay the vehicle at full cost. As you come closer to the termination of agreement, you are able to pay the remaining amount or return the vehicle (Option to Purchase Fee) to the finance company. There is also an option of paying the Option to Purchase Fee and sell the vehicle to a new owner.
Personal Contract Hire
A personal contract hire is specifically aimed to individuals to lease the vehicle. You are able to rent the vehicle, and will not have ownership of the car and the company will take possession of the vehicle when the agreement has terminated.
Payment Protection Insurance
When you cannot make regular monthly payments, Payment Protection Insurance can cover this cost. This tends to not be popular as claiming Payment Protection Insurance is very challenging.
If you are deciding to purchase a new car, you can trade in your old car and pay less for your new vehicle.
For all car finance companies, the full breakdown of the cost and other relevant information regarding the vehicle must be included on an official written quotation. Usually the quote is valid for 14 days, but the finance company should clearly tell you long the quote lasts for.
The payment of a balloon amount needs to be paid at the end of the contract for PCP or Lease Purchase. For some of the finance companies, the time you have to pay the remaining cost can be extended. A downside of re-finance is that additional interest and fees are included, making the overall price for vehicle much more expensive than initially.
Residual Value is the predicted price of the used car and its value over time after careful consideration of the age, mileage and condition. When the agreement has ended, the finance company must predict the value of a car and calculate the depreciation of the car over each year.
Specialised Automotive Finance (SAF)
The Finance & Leasing Association regulates a training and testing programme where they ensure the staff at car dealerships acknowledge regulations set by the Financial Conduct Authority regulations about selling finance.
An agreement where the finance company can take full possession of the vehicle if you do not pay the loan when you stop making payments. In some cases, the finance company may sell the car and still ask for the remaining debt.
Coming to an agreement at the end of the contract where the payment covers all outstanding money.
Term Length describes the payment period you have to pay off the finance agreement. The majority of car finance agreements can last between 1 – 5 years.
The complete cost of the vehicle, including the loan, interest, total credit and other fees you need to repay the lender.
A loan is given to the borrower as their credit is worthy to the lender. The risk of this unsecured loan is lower for you but is a higher risk for the lender. The finance company cannot take your vehicle even after you stop repaying the loan. However they can inflict damage on your credit rating and cause you to go bankrupted. If you have a poor credit score, this option is not the best choice for you.
The variable rate is where the interest rate is not fixed and fluctuates. Thus, your monthly payments of your car may increase or decrease depending on the rates set by the Bank of England.