Car finance jargon buster
A handy car finance glossary.
Buying a car on finance needn't be confusing.
So, to help you we've compiled the following A-Z of car finance terminology:
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.
The agreed fixed length of time in which you have to repay the finance.
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.
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.
Any money owed that’s overdue.
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.
Consumer Credit Directive. This is an EU directive designed to ensure transparency and high levels of customer protection when buying on credit.
Under the Consumer Credit Directive, you have a period of 14 days to reject and withdraw from a finance agreement.
This is the agreement between you and the financing lender.
This is the historical record of all your credit borrowing.
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.
When lenders view your credit history and determine whether you can afford to repay the debt.
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.
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.
This is when you decide to end the finance agreement early, and pay off the rest of what you owe.
Once you’ve paid all debts associated with your car, it then becomes equity because it’s an asset you own.
The Financial Conduct Authority. An independent body that regulates financial services in the UK, ensuring consumers get a fair and honest deal.
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.
This is a set interest which remains unchanged throughout the term of the finance agreement.
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.
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.
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 or guarantor loans, loans for younger people or those with minimal or no credit history.
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.
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.
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.
Negative equity is when a car has lost value and is worth less than the amount you still owe for the finance agreement.
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.
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.
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.
This is the value of the car at the end of your loan or finance agreement.
This is used to describe the length of time you’ll be paying off the finance agreement e.g 18 months.
This is the total amount, including the loan, total cost of credit, interest and fees, which you’ll repay the lender.
The interest rate isn’t fixed and can change across the term length due to fluctuations in the market.