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Car finance jargon explained

It’s easy to focus on how much the monthly payments are for a car and ignore all the other important-sounding finance jargon-y bits.

But it’s important to know what these terms mean to make sure you’re not paying more than you should. And, knowing what all the confusing words mean will help you stay in the clear with your finances.

We’ve rounded up every car finance-related term you might come across. But, if you still have questions on car finance after this, contact us and one of our friendly team members will walk you through it.

A

Acceptance fee/administration fee

This is an admin fee paid to the finance company to cover the costs of setting up the finance agreement – including sorting out direct debits and issuing paperwork. You’ll often find an acceptance or administration fee on most types of car finance.

Agreement

You’ve agreed to finance a car for a set amount of money over a set number of months, and have agreed to stick to any obligations from the finance company – such as a predetermined mileage limit on PCP deals. An agreement is the contract that you’ve signed.

Agreement term

How long your contract lasts for. This will be displayed as a number of months – such as 48 if you take out a four-year agreement.

Amount of credit

The cash price of the car minus the deposit you pay at the start of the deal. It’s how much you’re borrowing to cover the cost of the car, excluding interest and other fees.

Annual Mileage

On PCP and PCH (leasing) finance deals, you agree to stick to an annual mileage limit – for example 10,000 miles a year. This is because the car’s estimated mileage at the end of the contract determines how much it’s likely to be worth. So, if you take out a three-year deal, your paperwork might say you can cover 30,000 miles in that time and give you a maximum total mileage that you’ve agreed not to exceed.

It’s worth noting that the total mileage for the whole duration of the contract is more important than the annual mileage, but the annual mileage figure is easier to understand. So don’t worry if you cover 11,000 miles in your first year on a 10,000-mile-a-year deal – just try to keep to 9,000 miles the following year.

You should try to work out as best as possible how many miles you might travel over the course of a year. If you drive to work, work out the distance you’ll drive over the course of a working year. And will you have long trips for holidays or to visit extended family? All of your typical journeys need to be factored in before you agree to a certain mileage limit.

APR (Annual Percentage Rate)

Man in car looking confused

The rate at which you’ll pay interest over the course of one year during a finance agreement. This will be expressed as a percentage.

Arrears

Any money that’s overdue on your account – if you missed a monthly repayment, for example. Your finance provider will contact you if you drop into arrears. If you are struggling to afford the repayments, speak to your finance provider in the first instance.

B

Balloon payment

A less formal name for the Guaranteed Future Value (GFV) of a car on a PCP deal. Find out more on these terms below.

Battery lease

When electric cars were in their infancy, there were a lot of concerns about the longevity and replacement costs of battery packs. To counter this, some early electric cars, such as the original Renault Zoe, offered a battery lease. You are basically renting the battery for a monthly fee, but it ensures that the battery will be replaced if it fails prematurely.

Broker

A person or company who can connect you to lenders and arrange finance agreements on your behalf. They will have a good knowledge of the finance industry and will work with several lenders. It’s the same as having a mortgage broker if you buy a house.

C

CAIS

A credit reference agency that provides the data used by lenders about a person applying for credit. If you’ve had a credit agreement at any time, CAIS will have information on your profile and your credit history.

Capital

Capital is wealth in the form of an asset rather than cash. This could be a house or, in this case, your vehicle is your capital once you’ve paid off any outstanding finance.

Car finance

The act of spreading the cost of a car over monthly payments. Read all about car finance in our in-depth guide.

Car lease

Leasing is a form of long-term car rental where you won’t ever own the car. Car lease deals for private buyers are usually called PCH (Personal Contract Hire).

Car loan

Another car finance option is to take out a personal loan from a bank or building society. You get a lump sum of money which can be used to pay for a car outright, and you’ll need to repay the bank over an agreed number of months.

CCJ (County Court Judgement)

A CCJ is a court order that means you must pay an agreed sum of money to a car lender. It might be used if you miss several monthly repayments. A CCJ will appear on your credit file for six years, and will make it difficult for you to be approved for future car finance agreements.

Cooling-off period

The first 14 days after you buy your car where you can withdraw from the finance agreement and hand the car back without any penalties or charges. It’s covered under the Consumer Credit Directive (CCD), an EU regulation that was made law in 2010.

CRA (Consumer Rights Act)

A law introduced in 2015 that gives customers protection when buying goods or services.

Credit application

The act of applying for finance, whether it’s for a car, house or something smaller. Any money you’re lent is called credit.

Credit history

A record of your previous credit agreements and your repayment history. Lenders use this to decide if they can lend to you and, if so, how much risk you represent.

Credit lender

The finance provider that you are dealing with, and the ones who will give you the credit to finance a car.

Credit score/rating

A number based on your credit history which is an easy metric for comparison. Usually, the higher the number, the better your credit score – which means you’re more likely to be approved for a loan or for car finance.

Credit search

This is when a lender looks at your credit history to make a judgement on whether you can afford the finance and the risk factor that you present. There are two types – a hard search, which shows up on your credit history, and a soft search, which doesn’t. 

D

Default

If you continue to be in arrears and miss multiple payments, you’ll default on your loan. This can lead to increasingly more serious contact attempts from the finance company, and will drastically affect your credit score – meaning you’ll struggle to get future credit agreements. Consistent defaulting on your car finance agreement may lead the finance company to forcefully repossess the car.

Deposit/deposit contribution

Cars at Motorpoint Birtley

On a PCP deal, you can pay a deposit at the start of the arrangement, before the start of your monthly payments. This is an initial payment which reduces the cost of future borrowing. Often, you can choose no-deposit finance if you wish – including at Motorpoint – but your monthly payments will be higher because you’re financing more of the car’s value.

A deposit contribution is an incentive from a manufacturer or dealer. It’s basically a saving on the list price of the car, but packaged as a contribution towards your initial payment.

Depreciation

How much value a car loses over time. Depreciation starts from the moment a car gains its number plates – once it’s registered it’s officially ‘used’, even if it’s just sat in the dealership – and is steepest in the first year or two that a car is on the road.

On a PCP deal, you’re paying for the car’s depreciation – the difference between how much it’s worth now and how much it’s expected to be worth at the end of your contract.

DMP (Debt Management Plan)

If you have large or multiple debts, you may be able to consolidate your debts into one monthly payment that should be more manageable, perhaps with lower interest rates. You’ll need help from a debt charity or a debt management company to get a DMP in place.

E

Early Settlement

You can pay your finance agreement off early at any time, but you’ll need an early settlement figure from your lender. This tells you exactly how much is required to settle the finance agreement, and is usually valid for up to a month from when you request an early settlement.

Equity

If your car is worth more than the GFV at the end of your PCP deal, you have gained equity – money, essentially. This equity can be put towards a new PCP deal, perhaps covering the deposit or reducing the overall cost. See also negative equity.

Excess mileage charge

On PCP and PCH agreements, you need to stick to a predetermined mileage limit. If you go over your mileage limit you’ll be charged an excess mileage fee at the end of your contract. It’s usually expressed as a number of pence per mile – 10p per mile doesn’t sound like much, but it quickly adds up and can end up being hundreds of pounds if you go considerably over your mileage limit.

F

FCA (Financial Conduct Authority)

The UK’s financial regulator, which oversees all credit lenders and brokers to ensure the correct processes are being followed.

Finance agreement

Man in car looking at a clipboard

Your contract with all the costs and everything expected from you when you agree to take out car finance. Taking out finance means you can have the car you want, and the finance company benefits because you’re paying them interest.

Fixed-rate interest

When your interest payments are the same throughout your finance agreement – like locking in an interest rate on a mortgage. Fixed-rate interest deals may have higher interest than variable interest rate deals, but you avoid the potential for soaring interest costs that you might get on variable deals.

FOS (Financial Ombudsman Service)

A free service that resolves disputes between consumers and finance providers.

G

GAP Insurance

GAP stands for Guaranteed Asset Protection. If your car is written off in an accident or stolen, GAP insurance covers the difference between the car’s value and any outstanding amount due to the finance provider – so you won’t be out of pocket or paying for a car you can’t use any more.

GFV (Guaranteed Future Value)

A figure stated when you're setting up a car PCP finance agreement. It's the amount the finance provider thinks the car will be worth at the end of your finance deal, which will determine how big your balloon payment is if you decide to buy the car outright. Also called GMFV (M stands for minimum).

Gross and net income

Your gross income is your salary before tax, and net income is your take-home pay once all tax, national insurance, pension, taxable benefit and student loan contributions come out.

Guarantor loans

A guarantor loan is when you have someone acting as a guarantor. If you can’t make the repayments, the guarantor is the person who will become responsible for paying off any outstanding finance. Guarantor loans are most common for people with a limited or poor credit history.

H

Hard credit check/search

A detailed credit search that appears on your credit history. Multiple hard credit checks in quick succession will negatively affect your credit score.

HP (Hire Purchase)

A type of vehicle finance. Hire purchase agreements let you finance the entire vehicle cost over a fixed period. Usually, you'll pay a portion of the total amount owed upfront as a deposit, then the outstanding balance and interest will get split into monthly payments, usually between one and five years. HP is usually more expensive than PCP for the same car, but doesn't have a balloon payment at the end of the agreement.

Read our full guide to HP finance here.

HPI Check

Despite sounding similar, this has nothing to do with Hire Purchase finance. A HPI check is made on a used vehicle to make sure it hasn’t been scrapped, written off, exported or stolen. A clear HPI check should give you peace of mind that the vehicle is mechanically sound.

At Motorpoint, we put all our cars through a HPI check before they go on sale.

I

Interest rate/rate of interest

The amount of money you’ll need to pay to the finance company for lending you the money. Also called APR and usually expressed as a percentage.

IVA (Individual Voluntary Agreement)

An IVA is a debt repayment agreement between you and the company/companies you owe money to. If you have an IVA, you may find it difficult to be approved for a car finance agreement.

J

Joint application

When two or more people take out a car finance agreement together. Lenders will look at the combined credit scores and histories of all the people in the agreement, and all listed applicants are equally responsible for repayments.

On the plus side, a joint application could make it easier for, say, a married couple to get approved for car finance, or it could mean these people could borrow more and finance a more expensive car. However, if one of the applicants becomes unable to pay for their share of the monthly repayments, the liability to cover all of the cost would fall to the remaining applicants.

L

Late Fee

Lenders may add extra cost on to your finance agreement if you fall behind on your repayments.

Logbook loan

A logbook loan is a loan secured against your vehicle. If a logbook loan is made available to you, the finance provider will take your car’s V5C document (its logbook) until you’ve paid off the loan. If you fall behind on payments, the finance provider may repossess the vehicle. Logbook loans are primarily aimed at people with poor credit or people who need funds quickly, but often come with high interest rates. 

N

Negative equity

When you owe more in finance costs than the current value of the car. Most car finance deals are set up so that you’re in negative equity for the majority of the length of your contract. It’s nothing to worry about unless you want to leave your contract part way through.

To get out of negative equity on a car, you need to pay the settlement figure to the lender, or find a car dealer who will pay off your negative equity and tack that amount on to a new finance arrangement on a different car.

No-deposit finance

Customer shaking salesperson's hand at Motorpoint Burnley

No-deposit finance is available on HP and PCP deals, allowing you to pay nothing up front. This allows you to finance a car without putting down a large sum of money at the start of the contract but, because you’re financing more of the cost of the car and accruing more interest, your monthly payments will be higher.

O

Option to Purchase fee

A fee that gives you the opportunity to buy the car at the end of your lease or PCP deal. On most PCP deals – for new and used cars – the Option to Purchase fee is a minimal £10.

Optional final payment

Usually used interchangeably with GFV or balloon payment, an optional final payment is what it’ll cost at the end of a PCP contract to buy the car and own it outright. As the name suggests, it’s optional – if you don’t want to pay it, you can hand the car back and walk away or put any equity you’ve built up into a new finance agreement.

Outstanding balance

The amount of money you currently owe to the finance provider, including any interest and fees.

Overpayment

Paying more of the outstanding balance off sooner to reduce overall interest charges. This could be a one-off payment, for example, or paying a bit more than the documented monthly repayment cost over a longer period of time.

P

PA – Per Annum

The cost of something per year.

Part exchange

If you want to buy or finance a new car and have money in your old car – either if you own it outright or are in positive equity on a finance deal – you can use the value of your old car towards the cost of the new one. You may wish to part-exchange your car to avoid having to stump up a deposit for the new car, not to mention to avoid the hassle of trying to sell it privately!

Payment holiday

An agreement between you and the lender that allows you to temporarily pause monthly repayments in a period of short-term loss of income. However, you’ll still need to make these payments eventually – either by making the length of the contract longer or by paying higher monthly payments through the rest of the duration of the contract. And interest is still accrued during a payment holiday, which adds to the overall cost of the agreement.

PCH (Personal Contract Hire)

A form of vehicle finance, widely known as leasing. This means you essentially take out a long-term rental agreement on the car, with an initial rental payment and fixed monthly payments usually between one and four years. At the end of the agreement, you hand the car back and, if you want to, take out another agreement on a newer car. Unlike PCP, there is no option at any point to buy the car outright.

PCP (Personal Contract Purchase)

One lady handing car keys to another lady in a car

A type of vehicle finance. Similar to HP finance, PCP finance usually sees you pay a portion of the total amount upfront as a deposit, then a series of monthly payments, often over a two-to-four-year period. At the end of the agreement, you can pay or finance a balloon payment to become the car's owner, hand the car back, or use it as part exchange, rolling any positive or negative equity into another finance agreement.

Read our full guide to PCP finance here.

Personal loan

Instead of taking out a HP finance agreement, you might instead choose to take out a personal loan from a bank or building society. Depending on your individual situation, a personal loan may have lower interest rates than a HP deal, but it could affect your ability to get a loan for other things, such as a wedding or home improvement.

R

Repossession

If you repeatedly fail to make repayments on a car finance deal, the finance company – who owns the car until you make all the payments – may choose to take the car from you to try and recoup its losses.

Representative APR

A rate that finance providers use to calculate the total cost of borrowing and makes it easy for buyers to compare. However, this figure is representative and, depending on your individual circumstances, may not be the exact rate you’re offered.

Representative example

An example finance agreement that sets out what you can expect to pay for a similar car per month and what the related finance costs will be.

Residual Value

A car’s forecasted value after a set period of time – usually how much the car will be worth at the end of a finance contract. Can be used interchangeably with GFV or balloon payment.

S

Settlement

The amount of money you would need to pay to the finance company to complete your contract. Once you’ve paid the settlement, you become the legal owner of the car.

Soft credit check/search

A credit check that isn’t as in-depth as a hard search, and won’t show up on your credit history. These are usually used to gauge your eligibility for finance before undertaking a hard credit check.

T

Term length

The duration of your contract, usually displayed as a number of months.

Total Amount Repayable

The overall figure you are expected to pay to the lender, based on you continuing with your contract through to its duration. It includes the cost of the car, added interest and any additional fees regarding the finance contract. Paying the contract off early can save you money on interest in the long run.

V

Variable Rate Interest

A finance contract where the interest rate isn’t fixed and, instead, can fluctuate based on wider market conditions. It’s a good thing if interest rates are low, but you could end up paying more if rates rise.

Voluntary Termination

If you’ve paid at least 50% of the Total Amount Repayable figure on a HP or PCP agreement, you can arrange to hand the car back and not pay any more monthly payments. You’ll need to settle any charges for excess mileage or damage, if applicable. This is a good option if you need to save money as quickly as possible, but you’ll be left without a car and you won’t be able to benefit from any equity built up in the car.

W

Wear and tear

Finance companies don’t expect a used car to be in the same pristine, untouched condition that it would be when it’s brand new – cars can easily pick up scratches and stone chips when they’re covering thousands of miles a year. What’s known as ‘fair wear and tear’ is expected, but you’ll be charged for anything that steps outside of the lender’s expectations. You would be expected to have dents, deep scratches and accident damage fixed before the end of your contract.

Zzz...Still with us?

Motorpoint has thousands of exciting used cars for sale, all available to buy or finance. Once you’ve found a car you like, why not book a test drive at a Motorpoint store of your choice?