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Car Finance Glossary

There are so many UK finance companies, dealerships and even manufacturers offering loans and finance deals for cars that anyone who is looking for a car loan can be confused. The technical car finance terms can be confusing too and if you don't understand the finance terms your loan could cost you more than you expect. We have included some of the common terms used when arranging car finance and loans to help you understand what they mean and avoid unexpected additions to your loans. Our list of definitions should help you understand the car finance jargon and see your way to getting an affordable car loan.

0% Finance
This is a special deal where you pay no interest on the loan; i.e. if you borrow £5000, you pay back just £5000. Certain conditions may apply to these loans.

Adverse credit
See poor credit history

APR (Annual Percentage Rate)
Annual Percentage Rate. A Standard method of calculating how much the loan will cost you over the full period of the loan. The APR reflects the total charge for credit and is different to the flat rate.

Balloon payment
If you arrange your car loan using the PCP method, you can opt to make a final payment to purchase the car. This can be as much as 30% to 40% of the value of the car.

Bad credit history
If you have had problems, in the past, repaying a loan, credit cards, CCJs (County Court Judgements) then you might have a bad credit history. This does not mean you can't get a car loan, but it makes getting credit more difficult and your finance payments will be higher.

Cost to change
This is how much it would cost you to change your car. It is calculated by the difference between the value of your existing car and the price of a replacement car.

Credit agreement
This is simply a contract between you and the lender. They guarantee to give you a loan or a car and you agree to make the required payments at the relevant time. You can normally cancel these agreements within a few days, but if you signed on the dealer's or lender's premises, you may lose the 'cooling-off' period in which you can cancel without penalty.

Credit Rating/ Scoring
There is no "black book" where bad payers are listed. Your credit rating is calculated based on your earning and other loans you currently have or have had in the past.

Contract Hire
Contract Hire is the leasing of a vehicle for a fixed period of time at a fixed monthly rental.

Daily Rental
See Short Term Contract Hire

Depreciation
This is an indication of how much your car loses value over a period of time.

Equity
This is the difference between the value of your car and what you have left to pay off the loan.

Flat rate
The monthly interest rate charged. Beware of lenders quoting you the flat rate instead of the APR as it is lower, so sounds a better deal.

Finance Lease
This finance package gives you tax and VAT benefits and lets you own the car. The monthly rental is determined by the cost of the vehicle, the period and the estimated future value of the vehicle which is based on the proposed annual mileage.

Fixed rate
If the interest rate charged and/or the monthly payments are fixed, i.e. not going up/down with normal interest rates, throughout the full term of the loan, then the rate is called a fixed rate.

Gap Insurance
You are still liable for the loan if a car is written-off. Normal insurance only pays for the value of the car at the time of an 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. You can buy Gap Insurance as part of the agreement.

Hire Purchase
This is a very easy form of car loan to arrange. You pay a deposit, agree to pay a fixed monthly amount and get to drive away the car immediately. You don't actually own the car until you have paid for it in full.

Lease Purchase
This finance option is similar to hire purchase offering a flexible deposit, flexible repayment periods, and a flexible percentage of the purchase price can be deferred to the end of the agreement.

Manufacturer's deals
Some dealers and manufacturers offer special low interest or interest free finance on cars. These are often limited to new cars and certain models.

Minimum Guaranteed Future Value (MGFV)
If you arrange your car loan 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 the MGFV). At the end of the agreement you can opt to make a balloon payment to keep the car based on the MGFV.

Negative equity
If your car is worth less than the amount you have left to pay off the loan.

Option to purchase fee
If you arrange your car loan using the PCP method and want to keep the car, you may need to pay an additional charge to pay the car. This is in addition to the MGFV, so check this amount when arranging the loan.

Part Exchange
You can exchange your existing car as part payment for your new car. The dealers may offer you a better deal for your old car than you would through a private sale, in order to sell you a new car.

Payment Protection Insurance
This is an additional, optional, payment that you can make to cover you in circumstances where you are unable to pay your loan payments. These circumstances can include: unemployment, serious illness, inability to work, disability after an accident, or even death. The amount of pay out and the duration for these pay out differs between finance companies and their insurers, so make sure you read the conditions before you take out payment protection insurance.

Personal Contract Hire
This is similar to contract hire, but is geared towards individuals instead of business. This is a very good finance option for anyone who wants fixed cost motoring or is leaving the company car schemes. All scheduled servicing, replacement tyres, and unforeseen repairs are budgeted for in one simple monthly payment. This finance option also takes care of depreciation and disposal worries. Businesses may be able to claim VAT, but private individuals cannot.

Personal contract purchases (PCP)
Personal Contract Purchase is a new alternative to hire purchase loans. The car is leased by the individual from the dealer after paying an initial deposit. Unlike Hire Purchase the cost of the car is not spread over the loan period. This means that the monthly payments are lower, but the vehicle is not paid for at the end of the loan period. At the end of the payment period you can pay a balloon payment to keep the car, return the car to the dealer or part exchange for another car.

Personal Lease
This is effectively renting the car over a long period of time. It is similar to PCP in some respects in that you pay a monthly payment and return the car at the end of the agreement. The lease includes some services such as M.O.T or repairs. These finance agreements are based on the amount of miles you expect to do each year. Going over this can cost a few pence per mile, so make sure you arrange enough mileage to avoid getting a nasty shock at the end. As with PCP, you may have the option to buy the car at the end of the lease period by making a large payment.

Poor credit history
See Bad credit history

Residual value
This is the value of your used car taking into account depreciation, condition and mileage.

Sale and Leaseback
If your company already owns its own vehicles, your fleet of vehicles could be purchased at an agreed realistic market value and then leased back to you through the funding method of your choice. This method removes any residual value risk for your company and would enable a cash injection into your business thus increasing your working capital.

Secured loan
This is a type of loan where the loan is guaranteed by an item such as your car or home. If you do not keep up the car loan repayments, the finance company can repossess the item.

Short Term Contract Hire / Daily Rental
This is similar to Contract Hire, except that is available for a shorter term, up to a year. This is a good stopgap solution if you require extra vehicles for short periods or for staff that may only require a vehicle for a brief duration.

Trade value
This is how much your vehicle is worth in the car trade. This will be lower than your cars retail value or what you would get for it in a private sale because car traders need to allow for their own mark up (profit) when selling the car.

Unsecured loan
This is a type of loan where the loan is not guaranteed, opposite of Secured loan. Your car will not be repossessed if you miss loan payments, but you might get your financial history and credit rating badly affected.

Variable rate
If the interest rate charged can go up/down with normal interest rates during term of the loan, then the rate is called a variable rate.