Understanding how car finance works can be difficult for many, especially when unfamiliar jargon is thrown into the mixture. Here at MotorPocket we have compiled a glossary of the most used key terms that are commonplace in the finance world to help you grasp the lingo.26

A is for...

Acceptance fee - an additional fee, taken by the lender (finance company) to cover the admit cost of setting up the loan and sending out the relevant documents. It is an addition to the interest charged to the customer.

APR (Annual Percentage Rate) - the APR rate is a standard interest rate to allow you to compare across types of finance, it includes all the costs of lending, for example, interest and fees. It also takes into account that you are paying down the loan principal over the term of the loan.

The method of calculating APR is legally defined to ensure all lenders use the same method.

Agreement - the document that legally binds the contract comes after following an applications to obtain goods on credit/hire. It must be signed by both the customer and the lender.

Advance  - the invoice price of a vehicle, minus any existing deposit, and the amount of finance that is loaned to a customer. Interest is charged on the advance.

Assignment - this is when an item of value is transferred from one person to another. For example, if you were buying the car with cash it is immediately assigned to you. However, if you are buying the car using finance it is assigned to you once the final payment has been made under the terms of the agreement.

B is for...

Balance - the difference between the outstanding balance owned under the finance agreement and the amount paid. The balance reduces with every repayment made.

Balloon Payment - also known as a lump sum payment, a Balloon Payment is a significant amount of the loan deferred to the end of the loan period. For PCP loans, this is known as the Guaranteed Minimum Future Value or Optional Final Payment.

Deferring part of the loan to the end of the term, means lower monthly repayments during the loan term.

Broker - is an individual or firm, who can access products from a range of lenders or insurers.

C is for...

Capital - the amount of outstanding finance due to be repaid, excludes any interest charged, must be repaid immediately or by instalments.

Consumer Credit Act - the Consumer Credit Act 1974 and 2006 provides consumers with protection including rights for early settlement and cooling off periods. It sets out how credit should be marketed and managed.

Cost of Credit - this is the total amount borrowed plus interest and fees charged over the term of the loan or finance agreement.

Contract - this is a legally binding signed agreement between two or more people to purchase financial products.

Credit Reference Agency - an organisation that collects, stores, and provides information about your credit history, both past and current, to lenders in order that they are able to make a fair, consistent, and responsible decision in relation to a lending proposition.

The main agencies are: Equifax, Experian, CallCredit.

County Court Judgement - you may receive a County Court Judgement (CCJ) if you fail to repay money you owe and the lender takes you to court to recover the payment. It details how the outstanding balance will be repaid and by when.

Should you receive a CCJ (or high court judgement) it will remain on the Register of Judgements and Orders and Fines for over six years.

Credit Agreement - this is a signed legally binding agreement between you (the borrower) and the company (the lender).

Credit Score - this is a score based on your current circumstances and history (otherwise known as your track record) of paying back previous and existing debts which gives an indication (or score) of how likely you are to repay future debts.

The credit score calculated by each lender and credit reference agency will differ depending on their individual assessment of credit risk.

Credit Search - the finance broker or lender will search the information held by the Credit Reference Agencies to view your credit history, before agreeing further borrowing. Credit searches are often split into 'soft' or 'quotation' searches that do not impact your credit score and 'hard' or 'application' searches that record your application for credit and are usually included in lender credit scores.

Frequent 'hard' searches can have a negative effect on your credit rating as they are considered a sign of difficulty finding credit.

Creditor - the company that provides you finance.

D is for...

Debtor - the person who owes money.

Deposit - the initial payment (which is generally a cash amount or part exchange) which will be reduced from the balance owed.

Depreciation - this is the difference between what you paid for something (e.g. your car) and what it is now worth (value).

Document Fee - an additional charge that is sometimes made by the lender. This can relate to documents in relation to the option to own the vehicle at the end of a purchase agreement or the initial document creation cost.

E is for...

Early Settlement - this is the term used when you pay off a credit agreement before it is due to end. If the loan is a regulated agreement under the Consumer Credit Act 1974, you can early settle your loan in full or part at any time and there is a legally specified rebate that the customer must be given.

End of Agreement/Contact - once all the payments have been made including fees on the agreement. For Hire Purchase, Lease Purchase, and Personal Leasing this is when the title of the car transfers to you the customer.

Equity - this is the difference between the value of the car and the amount owed still. Negative equity refers to the situation where the amount owed is greater than the value of the car.

F is for...

Financial Conduct Authority - regulates all providers of financial services in the U.K.

Financial Services Authority - financial services regulator until 2000, when it was split into the Financial Conduct Authority and Prudential Conduct Authority.

Fixed Rate of Interest - the interest rate is agreed at the start of the loan and remains the same until repaid, it cannot be altered.

Flat Rate of Interest - interest is charged each year on the total amount borrowed and term of the loan regardless of any repayments made, which include capital and interest, until the loan is repaid.

Forecourt Finance - this is the term used when dealers offer you finance at the same time as you purchase your car.

G is for...

GAP insurance - GAP insurance provides cover against the risk that your car is stolen and unrecoverable or written off that your motor insurer's settlement is less than either:

  • Your finance outstanding or lease termination charge
  • The original purchase price
  • The cost of an equivalent brand new vehicle

This depends on the policy type chosen.

Guarantor - the loan paperwork is co-signed by a guarantor who will make the payments should the borrower be unable to meet their obligations. The loan is the borrower's responsibility however the lender has the added security to know they can obtain payment from the guarantor should the need arise.

Guaranteed Minimum Future Value (GMFV) - this relates to PCP agreements. The GMFV or GFV is the amount of loan deferred to the end of the loan term and is broadly in line with the expected value of the car at that time. It therefore depends on the expected mileage and age of vehicle at the end of the loan term. Effectively the leader guarantees they will pay this amount of the car, so you can return the car to the lender at the end of the term and walk away if you wish.

H is for...

Hire Purchase (HP) - this is a finance agreement that is secured on the vehicle and lets you pay for your vehicle in fixed monthly repayment amounts over an agreed period. Once all repayments have been made you own the car. There are no mileage restrictions.

HPI Check - this confirms if the vehicle has outstanding finance, been reported as stolen, mileage discrepancy or previously written-off. It also confirms many other details including make, model, colour, and engine size. It is a very useful check that gives you piece of mind before buying a used car.

I is for...

Instalments - set repayments repaid within an agreed timescale in line with the credit agreement.

Interest Rate - an amount charged by the lender for the use their money over a specified period of time. This is also known as the cost of borrowing money. It can either be a Fixed or Variable rate of interest.

Intermediary - this is the link between the individual searching for finance and the person (dealer) selling the vehicle. The intermediary acts as a broker between the two parties.

Invoice - this document confirms price paid, vehicle details and purchaser information.

J is for...

Joint Application - where two people want to apply for finance in order to meet the affordability criteria, this means that both parties are individually and jointly liable for the outstanding finance until the debt is repaid in full.

L is for...

Lease Purchase (LP) - is a finance agreement secured on the car. Part of the loan (known as a balloon payment) is deferred to the end of the loan, which means the monthly repayment amounts are reduced.

At the end of the loan term you must pay the deferred amount, either from your own funds or selling/part-exchanging the vehicle. Lease Purchase can be useful where PCP is not available, for instance with older cars. There are no mileage limitations.

Loan - amount of money borrowed plus interest which is repaid in line with an agreed payment plan.

Liability - a customer's responsibility under the finance agreement to repay the outstanding borrowing.

N is for...

Negative Equity - the difference between the value of the car and the amount of finance still outstanding, when this is greater than the actual value.

O is for...

Option to Purchase - this only applies to a Hire Purchase agreements, and is payable at the end of the agreement, once paid the title is transferred from the finance company to the customer.

P is for...

Part Exchange - when a customer exchanges their existing car with a dealer, this acts as a deposit, in order to secure their next vehicle by reducing the total amount due.

Personal Contact Purchase (PCP) - is a type of finance secured on the vehicle where part of the loan is deferred to the end of the loan term. The lender guarantees the car will be worth the deferred amount. This reduces the monthly repayments as you are not repaying the full value of the car. This may mean that you can afford a more expensive vehicle.

In order to calculate the future value, a mileage limit must be agreed, if this is exceeded you may incur additional costs. At the end of the term there are three options:

  • Return the car to the lender to repay the deferred loan amount
  • Repay any outstanding finance and take ownership of the car
  • Sell or part exchange your car to repay the outstanding finance and use any excess in value as a deposit for your next car

Pre-registration - cars that are registered by the dealership, to meet a manufacturer quota and thereby earn their dealership bonus. These cars are then sold on cheaper than a brand new car.

R is for...

Rebate (Early Settlement) - a refund due to the customer following early repayment of a finance agreement.

Repossession - if you purchase a vehicle using finance it remains the property of the lender until the final payment has been made. Should you fail to repay the finance the lender can take possession of the car again. Although before this can happen you must be served with Default Notice.

Once you have paid more than one third of the total amount payable, the goods are classed as protected and cannot be repossessed without a court order or your informed consent.

Representative APR - this is the APR that at least 51% of applicants can expect to be charged.

Residual Value - this is the value of the car at the end of the finance or lease agreement.

S is for...

Secured Loan - the money borrowed is secured against an asset you own generally a house or car. If you fail to make repayments, then your car or house can be subject to repossession.

T is for...

Title - legal ownership of the vehicle. This may not be the same as the name on the V5 or logbook. If there is finance secured on the vehicle, the owner will be the finance company.

Total Amount Payable - this represents the total amount the customer pays and includes amount borrowed, charges, and interest and fees. So the customer is aware of how much the total lend has cost overall.

Trade in - a vehicle offered as part payment in order to purchase the next - see Part Exchange.

V is for...

Valuation - this is a professional guide as to the value of your car at any specific point in time and can be used to give you an indication of how much your car is worth, or for insurance purposes.

Variable Rates - if your loan is linked to the Bank of England then the loan repayments will fluctuate in line with Base Rate and therefore will fluctuate accordingly.


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