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Jamie Gibbs

Car finance jargon buster

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A handy car finance glossary.

Car dealership

Buying a car on finance needn't be confusing. 

So, to help you we've compiled the following A-Z of car finance terminology:


Jump to:

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z


 

A

Administration fee

This is a fee usually charged at the start of the finance agreement. It's paid to lenders to cover their administrative cost, such as issuing relevant documentation and setting up the finance. It's also known as an acceptance fee.

Agreement term

The agreed fixed length of time in which you have to repay the finance.

Annual mileage

This refers to the amount of mileage a car on finance is allowed to drive each year. Be careful not to underestimate your mileage as you’ll be charged extra if you go over the agreed limit. The added charge is usually a few pence per mile.

For personal contract purchase deals, your estimated mileage is important - the more use the car gets, the more it depreciates. Dealers want to know the car’s likely value at the end of the agreement, so this will factor in.

APR

Annual percentage rate, also known as interest rate. This is how much extra you’ll have to pay back on top of the amount you borrow. This is usually represented as a percentage of the amount outstanding.

Arrears

Any money owed that’s overdue.

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B

Balloon payment

This is a large final payment at the end of some financing agreements. This payment allows you to take ownership of the car. This figure will be worked out and agreed at the start of the agreement.

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C

CCD

Consumer Credit Directive. This is an EU directive designed to ensure transparency and high levels of customer protection when buying on credit.

Cooling-off period

Under the Consumer Credit Directive, you have a period of 14 days to reject and withdraw from a finance agreement.

Credit agreement

This is the agreement between you and the financing lender.

Credit history

This is the historical record of all your credit borrowing.

Credit rating

Also known as a credit score, this is based on your past credit history and existing debt. Lenders use the information held in your credit file to decide what rates to offer you. They won’t be able to see your actual score, though.

Credit search

When lenders view your credit history and determine whether you can afford to repay the debt.

Customer deposit

Or just deposit, is the initial payment you put down towards the car at the start of the finance agreement. The larger your deposit, the lower your monthly payments, and the more likely you’ll be accepted.

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D

Deposit contribution

A deposit offered by the manufacturer or dealer, which they can put towards your finance agreement. It’s usually around £1,500 - £2,500 but it depends on the offer and the car.

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E

Early settlement

This is when you decide to end the finance agreement early, and pay off the rest of what you owe.

Equity

Once you’ve paid all debts associated with your car, it then becomes equity because it’s an asset you own.

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F

FCA

The Financial Conduct Authority. An independent body that regulates financial services in the UK, ensuring consumers get a fair and honest deal.

Finance agreement

This is the agreement which confirms the terms of the finance contract. It usually explains the monthly payments, cancellation terms and what happens at the end when the finance has been repaid.

Fixed-rate interest

This is a set interest which remains unchanged throughout the term of the finance agreement.

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G

GAP insurance

Guaranteed asset protection – a type of insurance which covers the difference between the original cost of the car and its value when written-off or stolen. Basically, GAP insurance is cover against depreciation.

GFV

Guaranteed future value – this is what the car will be worth at the end of the finance term. It also describes the cost of balloon payment.

Guarantor

This is usually a parent or close relative who agrees take on the debt if you can’t longer keep up with the repayments. A guarantor is usually required for specialist loans, loans for younger people or those with minimal or no credit history.

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H

Hire purchase

This is sometimes shortened to HP. This finance deal normally involves putting down a deposit and then is repaid with fixed monthly instalments. You don’t own the car until the debt is fully repaid. See our hire purchase guide for more information.

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J

Joint application

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.

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L

Lease purchase

Sometimes shortened to LP – this form of finance works almost exactly the same as a personal contract purchase. The only difference is that, at the end, the final balloon payment must be paid.

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N

Negative equity

When a car has lost value and is worth less than the amount you still owe for the finance agreement.

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P

Part exchange

Trading in your old car and using it as a contribution towards a new one.

Personal contract purchase

Also known as PCP – the finance is repaid with monthly payments and often starts with an initial deposit. You don’t own the car unless you decide to pay the optional balloon payment at the end. See our PCP guide for more information.

Personal loan

Where you borrow the full amount for the car and own it from day one. You then make monthly repayments to pay back the debt. You can take out a secured and unsecured loans.

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Q

Quotation

Also known as a soft search. It’s a type of credit search which doesn’t leave a trace on your credit file. It’s used to give finance companies an indication of risk and to decide how much they can offer you.

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R

Residual value

This is the value of the car at the end of your loan or finance agreement.

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S

Secured loan

Secured loans tend to have lower rates, but if you don’t keep up with the repayments you risk losing whatever it was you used as collateral (eg your car). See personal loan.

Soft search

See quotation.

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T

Term length

This is used to describe the length of time you’ll be paying off the finance agreement e.g 18 months.

Total repayable

This is the total amount, including the loan, total cost of credit, interest and fees, which you’ll repay the lender.

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U

Unsecured loan

Unsecured loans are when you don’t have to offer up any kind of collateral in order to get the money. This means less risk to you, but higher interest rates. See personal loan.

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V

Variable rate

The interest rate isn’t fixed and can change across the term length due to fluctuations in the market.

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