Finance terms can be confusing when choosing the right finance option for you and if you don't understand the finance terms, the loan could cost you more than you expected! Below are some common terms used when arranging car finance and loans to help you understand what they mean and avoid unexpected additions to your loan.
This list of definitions should help you to understand the car finance jargon and see you to getting an affordable car loan for your dream car.
This is a deal where you pay no interest on a loan.
The number of initial payments payable by way of deposit followed by the number of payments to be made.
An initial fee, often levied by finance companies, payable on signing of a finance agreement.
This is a standard method of calculating how much a loan will cost you over the full period of the loan. The APR reflects the total charge for credit. This is not the flat rate.
If you choose to use PCP as your finance option when buying a used car, you can defer part of the loan to the end of the agreement - a balloon payment. You can either pay this amount off and the car is yours or you can give the car back to the motor finance company.
This is the cost of how much it would be to change your car. This is calculated by the difference between the value of your existing car and the price of the replacement car.
This is a contract between you and the lender, this could be a motor finance company or a bank for instance. They guarantee to give you a loan or a car and you agree to make the required payments at the relevant time.
This is leasing a vehicle for a fixed period of time at a fixed monthly rental.
An initial payment of a portion of the capital cost of the vehicle. This usually takes the form of cash / cheque or equity in a part-exchange vehicle.
This is an indication of how much your car loses value over a period of time.
This is the difference between the value of your car and what you have left to pay on the loan.
This is the agency appointed by the government under the Financial Services Act to oversee the regulation of the whole financial sector, including supervision 01 the Bank of England, Since January 15th 2005, UK companies involved in General Insurance mediation must have authorisation by the FSA if they sell, arrange, advise on or assist in the administration of insurance or reinsurance contracts.
Within the Motor Finance market this will include Payment Protection Insurance (see PP I) and GAP insurance. Authorisation is needed if they either sell directly or act as an intermediary when undertaking these activities. Dealers who are not authorised cannot even discuss or comment on insurance.
If the interest rate charged and/or the monthly payments are fixed throughout the full term of the loan, then the rate is called a fixed rate.
A 'flat' interest rate is the most common method used to calculate interest charges payable on a finance agreement. It is normally on a per annum basis and the total interest is calculated on the amount of money borrowed and the term of the loan . Interest is charged on the full amount of a loan throughout its entire term. The flat rate takes no account of the fact that periodic repayments, which include both interest and capital, gradually reduce the amount owed.
You are still liable for a loan if a car is written-off. Normal insurance only pays for the value of the car at the time of the accident or theft, which may be less than the amount outstanding on the loan. Gap Insurance covers the 'gap' between what the insurance pays out and what remains of the loan.
Guaranteed Minimum Future Value.
Please see our dedicated section on Hire Purchase as a finance option.
If you arrange your car finance using the PCP method, you defer a percentage of the total cost of the car to the end of the contract. This percentage is known as the Minimum Guaranteed Future Value (MGFV). The MGFV plus your deposit is subtracted from the selling price of the vehicle and your monthly payments are based on the balance (plus interest on the balance and MGFV). At the end of the agreement you can opt to make a balloon payment to keep the car based on the MGFV.
Manufacturers Recommended Price Residual Value The value of the vehicle at the end of the agreement, normally estimated at the beginning of any agreement.
If your car is worth less than the amount you have left to pay on your loan.
If you arrange your car finance using the PCP method and want to keep the car, you may need to pay an additional charge to pay the car.
The value of the vehicle, being the price when new together with the cost of extras. This value is used by the Inland Revenue for taxation purposes.
You can exchange your existing car as part payment for your new car. Please see our dedicated section on part-exchange and selling your car.
Please see our dedicated section on Personal Contract Purchase as a finance option.
Pence per mile.
This is the value of your used car taking into account depreciation, condition and mileage.
Road Fund Licence.
Rate of Interest charged that changes in response to movements in the base rate of interest used. This Rate of Interest is also known as 'base rate' linked, but unlike 'fixed rate', it may change during the life of an agreement in line with current market conditions. This means it could go up - costing the customer more; or go down - costing the customer less.
Whole Life Cost - The total cost, including depreciation, servicing, fuel etc., incurred in running a vehicle for a defined period of time.