Car Finance Jargon Buster

When looking into the car finance market, we couldn't help feeling very confused by a lot of the terms being used – it all just seemed a little overwhelming. Car finance doesn't need to be that confusing, so we decided to simplify the important terms and outline them in this glossary for you. There's no need to feel bogged down on the jargon; by using this guide you can confidently secure the deal that's best for you.

Car finance

A

Administration Fee

An administration fee is the premium you have to pay at the start of your finance agreement. You normally pay this fee to lenders to cover their administration costs – setting up finance, registering the deal on the system and issuing or digitising the documentation. Administration fees are common on both PCP (personal contract purchase) and PCH (personal contract hire) deals. If you come across the term ‘acceptance fee’, don’t worry – these mean the same thing.

Agreement Term

The agreement term is the window of time that you’ve agreed to repay the finance in. Three years is the average length of time for this type of term in the UK, but you may be able to charm your way to a longer agreement term if you negotiate nicely.

Annual Mileage

Annual mileage refers to the limit of miles you’re allowed to drive each year without incurring any extra mileage charges – normally at a rate of a few pence per mile if you go over the limit. This depends on whether your finance agreement has a mileage limit. If your finance agreement has a limit, you’ll need to estimate your annual mileage when signing off on your initial agreement.

APR

Let’s be honest – we’ve all had moments when we’ve forgotten what APR stands for, so you’re certainly not alone here. The Annual Percentage Rate (APR) is another name for the interest rate. It calculates interest charges and other fees you need to pay as part of your finance agreement. APR is a great way to compare car finance deals in the marketplace.

Arrears

Arrears means money that’s overdue. If you still owe money that should have been paid back earlier, it’s likely that you’ve missed a payment – in this circumstance, you’ll be in arrears.

B

Balloon Payment

No, it’s not party-related – we were disappointed too. A balloon payment is the final, larger payment due at the end of a Lease Purchase or PCP agreement. You need to pay this final amount in order to take ownership of your car. This figure is calculated at the start of your agreement and allows you to reduce your monthly payments in exchange for a larger payment at the end of the agreement. So as it’s the final payment, maybe there’s still a cause for celebration.

Balance

The balance is the amount of money left over after all payments or charges are calculated. A negative balance is the amount you owe, a positive balance is the amount you have available to use.

C

CCD

Consumer Credit Directive (CCD) is an EU directive that helps to ensure transparency and customer protection when buying on credit. It was introduced in 2010 and broadly applies to all consumer credit agreements between €200 and €75,000.

Cooling-Off Period

This is part of the Consumer Credit Directive. You have 14 days to reject and withdraw from a finance agreement or cancel a contract without facing a penalty. The cooling-off period starts the day after you agree to go ahead with a deal or service over the phone, online or on your doorstep and lasts for 14 calendar days – not 14 working days.

Credit Agreement

A credit agreement is a legal contract signed by you and the financial lender, when you decide to take finance out.

Credit History

Your credit history is the track record of how reliable you’ve been when repaying your debts. It demonstrates your responsibility in repaying old debts and shows how likely you are to repay a new debt in a timely manner. It is based on several sources – banks, credit card companies, collection agencies and government bodies.

Credit Rating

Your credit rating is the number that illustrates how likely you are to pay your credit back and complete your financial commitments. This is also known as your credit score.

Customer Deposit

A customer deposit is the initial down-payment you make at the start of your finance agreement. You pay a larger deposit at the beginning so that your monthly payments are lower. This can improve your chances of being accepted for a finance deal.

D

Deposit Contribution

A deposit contribution is the amount offered by the manufacturer or car dealer that’s put towards your financial agreement. It’s usually in the region of £1,500 to £2,500 depending on the car you’re purchasing and any special offers currently on it.

E

Early Settlement

Early settlement is when you end your finance agreement early by paying off the rest of your debt. To do this, you’ll have to ask the finance provider for a settlement figure, which may include an early repayment charge. You might also see this written as an early repayment.

Equity

Once you’ve repaid all of the debts on your car, it will become an asset you own – this is known as equity. You can have positive equity or negative equity. Negative equity is when the car is worth less than the amount you still owe.

F

FCA

The Financial Conduct Authority (FCA) regulates all financial services in the UK. They are independent of the UK Government and are there to help consumers get a fair and honest deal.

Finance Agreement

The finance agreement confirms the terms of your 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

Fixed-rate interest means that your interest payments won’t change during your finance agreement. You’ll pay the same amount of interest every month.

G

GAP Insurance

Guaranteed Asset Protection (GAP) is a type of insurance that covers the difference between the original cost of your car and its value when written-off or stolen. Essentially, GAP insurance is cover against a depreciation in your car’s value.

GFV

Guaranteed future value (GFV) outlines what the car will be worth at the end of your finance contract. It also describes the cost of the balloon payment.

Guarantor

A guarantor is a third party, usually a close relative like a parent or guardian, who agrees to pay your debts on your behalf if you can’t keep up with your repayments. Guarantors are usually required for younger people, those with minimal or no credit history, and specialist loans.

H

Hire Purchase

Hire Purchase (HP) is a finance deal that generally includes an initial deposit followed by fixed monthly payments. Under hire purchase, you don’t own the car until you’ve fully repaid the debt.

L

Lease Agreement

A lease agreement 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. You will sometimes see lease agreement abbreviated to LP.

P

Part Exchange

In a part exchange, you trade in your old car as a contribution towards your brand new one. You’ll then pay the difference by taking out finance or transferring the cash. This type of process saves you the hassle of selling your old car, as you essentially swap it for a new one.

Personal Contract Purchase (PCP)

A Personal Contract Purchase (PCP) requires you to make monthly repayments after an initial deposit. You’ll only own the car if you choose to make a balloon payment at the end of the contract.

Personal Loan

A personal loan allows you to borrow money and pay for the car in full at the beginning – this means you’ll own the car from day one. You’re then required to pay the money back in fixed amounts each month.

Armed with these key terms, navigating the world of car finance will be a whole lot simpler. For more advice on buying, selling and owning cars, check out the other finance articles on the Gumtree advice hub including our car finance checklist.

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