Car Finance Jargon Buster

Buying a car is a big financial commitment. You want to be confident that you know what you are signing up to and that it the best option for you. This can be difficult when there are strange terms and acronyms flying around, like MSRP, PCP and balloon payments. If you find it all a bit confusing then you are not alone. To help you find your way through your finance deal here are some of the most common terms explained.

Administration/Acceptance Fee

This is a payment that you make at the start of your financial agreement. It goes to the lenders to cover their administration costs.

Agreement Term

This is the time you have to repay the loan. It is usually 1-5 years.

Annual Mileage

Some types of finance agreement have a limit on the number of miles you can drive per year. If you exceed this amount, you will have to pay an extra fee. You often see these in Personal Contract Hire deals.

APR/Interest Rate

APR, this stands for annual percentage rate. It tells you how much extra you have to pay back. It’s basically the charge for borrowing the money. It is quoted as a percentage.

Arrears

If you miss a payment, the money that is overdue is called ‘arrears’.

Balloon Payment

If you have a Hire-Purchase finance deal, the last payment is called a balloon payment. It is the payment that allows you to take ownership of the car. It is also often larger than you monthly payments have been, thus the name.

CCD

CCD is a European directive. It stands for Consumer Credit Directive. It is a set of rules that provide customer protection when buying items on credit.

Cooling-Off Period

As part of the CCD, you must be given a period of time in which you can change your mind about the deal you have signed. This should be a minimum of 14 days.

Credit Agreement

This is just the general name for any agreement between a borrower and lender.

Credit History

Your credit history is a record of all the times you have borrowed money.

Credit Score/Rating

Your history of borrowing in the past is analysed to see how risky it might be to lend you money. If you have borrowed money and paid it back on time, then you will have a high score, and you will find it easy to get a loan. If you have had problems in the past and missed payments then you might have a bad score, and this can make it harder to get a finance deal.

Credit Search

This is when lenders look at your credit history to decide if they will give you a loan or not.

Deposit Contribution

Some dealers will offer a deposit contribution to try and encourage you to buy a car. This just means that they will put in an amount of money towards your deposit. It’s like knocking money off the price. By putting it into the deposit though it means that your monthly payment can be smaller.

Early Settlement

If you decide to pay off the whole amount you have left early, this is called an early settlement.

Equity

Equity refers to anything you own that has value. Once you have paid off the loan on your car, you will own it, and it can be sold of money, so it is considered equity.

FCA

The Financial Conduct Authority (FCA) is the independent organisation that is responsible for overseeing all financial services in the UK. Their role is to protect consumers.

Finance Agreement

This is the contract you have with the finance company. It should outline the details fo the agreement, including any payments you need to make.

Gap Insurance

If your car is written off or stolen, then the money you receive from your insurer will be equal to the value of the vehicle at the time you lost it. Gap insurance provides you with the difference between the value of the car and its original cost. It covers the depreciation of the car.

GFV

GRV stands for Guaranteed Future Value. It is what the car will be worth when the finance agreement ends. It is used to determine the balloon payment.

Guarantor

If the finance company has any concerns that you might not be able to pay the loan, they may ask you to have a guarantor. This often happens with younger buyers or people with no credit history. The guarantor will be responsible for paying the debt if you miss a payment.

Hire Purchase

This is an arrangement with the finance company where you hire the care until you have fully repaid the loan. You make a deposit, followed by monthly payment and a final balloon payment. After this, you own the car. You may see this shortened to HP.

Lease Purchase

This is a type of finance agreement where the car is used to secure the loan, so you don’t own the car until you make the final balloon payment. You may see this shortened to LP.

MSRP

MSRP stands for the manufacturer’s suggested retail price.

Negative Equity

This is a situation that happens when, due to depreciation, the value of the car is less than the amount you have left to repay on the loan.

Part Exchange

This is an arrangement where the dealer takes your old car as part payment for your new car.

Personal Contract Purchase

This is a type of finance agreement that uses the car as security for the loan. This means that you don’t own the vehicle until the final balloon payment is made. In this agreement the final payment is optional. You can just return the car instead. You may see this shortened to PCP.

Personal Loan

With this personal finance deal, you will take a loan out for the whole amount of the car. With this, you own the car from the start.

Residual Value

This is the value of the car at the end of the agreement.

Secured Loan

This is where you use something as collateral, like the car or something else with a high value. If you miss a payment then the finance company can take whatever you use as security. Doing this can give you a lower interest rate.

 

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James Hogg

James Hogg is an author and scottish car fanatic writing exclusively for Slainte.co.uk knowledge library guides. He has a passion for driving fast motorcars and also enjoys riding motorbikes at the weekends and on track days. James is also a contributor and author to the Slainte car finance pages.

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