The world of car finance can conjure up a whole load of confusing words, acronyms and phrases and we’re here to help keep things simple.
Finance is an agreement between you and a lender. The lender agrees to pay the total cost of something you want to buy immediately (like a car) and you agree to pay the lender back over a period of time. You benefit by getting the thing you wanted to buy immediately and the lender benefits by charging you interest on the cost of the purchase.
Optional purchase payment
Also known as a “balloon payment” or “Guaranteed Minimum Future Value”.
If you choose to pay monthly for your car with a Personal Contract Purchase (PCP) deal, the lender will guarantee that your car will be worth a certain amount of money at the end of the agreement. It’s also the amount of money you’ll need to pay at the end of the agreement if you want to become the legal owner of the car.
Also known as “Annual Percentage Rate”.
APR refers to the amount of interest a lender applies to the money you borrowed from them, each year. It’s a good way to compare different finance options, as a lender offering a lower APR is charging you less money for borrowing from them.
Option to purchase fee
This is a fee charged by a lender at the end of a Hire Purchase or Personal Contract Purchase agreement. It covers the cost of transferring the legal ownership of the car to you.
See also: APR
Interest is the amount of money that a lender charges you for borrowing from them.
PCP (Personal Contract Purchase)
PCP is a form of car finance agreement that is likely to suit you if you don’t mind a limitation on your annual mileage and you want to keep your options open at the end of the term.
Read our guide to Personal Contract Purchase here.
HP (Hire Purchase)
HP is a form of car finance that is likely to suit you if you don’t want a restriction on your annual mileage and want to own the car.
Read our guide to Hire Purchase here.
A deposit is the amount of money that you pay upfront to secure a car finance agreement. The larger your deposit, the lower your monthly repayments will be.
This is the number of miles a car has driven. There’s also annual mileage, which is the number of miles you expect to drive a car in a year.
Annual mileage is particularly important for PCP agreements because if you exceed the annual mileage you agreed to, you’ll need to pay the lender the mileage excess charge detailed in your agreement.
Wear & tear
Wear & tear describes very light damage caused to a car through normal and reasonable usage. It’s reasonable to expect that a car’s paintwork would have a couple of extra light surface scratches after a year of driving but it’s unreasonable to expect a car to have a dent in the bodywork (which would be classed as damage).
If you take out a PCP agreement, you need to make sure that the car’s condition is within the standards that you and the lender agreed to at the start of the agreement, or risk fines.
Damage describes anything that worsens the car’s condition beyond expected wear & tear. This covers things like heavy scratches, dents, mechanical problems and broken glass.
If you pay for a car on a PCP agreement, the lender will normally expect you to repair any damage done to the car before you give it back to them at the end of your payment term.
Negative equity describes a situation where the car’s market value is lower than the amount of money you owe the lender. It means that, even if you sold the car, you would still owe the lender money because the funds from the sale wouldn’t cover what you owe.
Negative equity won’t be a problem if you make all the repayments in your agreement. However, because most cars depreciate in value, negative equity can become a problem if you choose to end your agreement early.
Part exchange is where you pay for part of your new car using the value of your current one. We make this super easy, just pop your car’s registration number into our Sell Your Car page to see how much your car is worth!
A lender is a person or organisation that you borrow money from in order to pay for your car.
An acceptance fee is charged by the lender for the cost of setting up your finance agreement. It covers the cost of things like verifying your identity, running credit checks and other administration.
The settlement figure is the total amount of money you need to pay to the lender in order to end your finance agreement.
Your credit score is a points value that a credit reference agency gives to you. It’s based on your previous financial conduct, including things like:
- How much debt you currently have.
- How much credit you have available to you
- Whether you’ve paid previous bills on time
Leaders use your credit score to determine how likely you are to pay back the amount you borrowed, on time and in full. You may find it difficult to obtain credit if your credit score is low.
A credit report is a great piece of kit that gives you loads of information about your credit history. It’s a good idea to check your credit report before applying for finance, since it will show you the information that the lenders you apply to will see and give you a chance to correct any mistakes.
The great folks at moneysavingexpert.com have a brilliant guide on how to check your credit report for free.
Term refers to the amount of time (or number of months, usually) your finance agreement will last.
Also known as finance contract or deal, an agreement contains everything you agree to do in order to borrow money from a lender to pay for your car.
It’s important to read your agreement in full before signing it, since it contains details about your obligations and rights.
The legal owner is the person or organisation that paid for the car. If you take out a finance agreement to pay for your car, the lender will almost always be the legal owner of the car. This can be important to remember when you apply for insurance, since some insurance companies need to know who the legal owner is.
The registered keeper of a car is the person who has the right to use it and is legally responsible for it.
If you take out a finance agreement, you will be the registered keeper of the car until you’ve paid all your repayments and any option to purchase fees – at which point you’ll become the legal owner of the car.
Overpayment is where you pay more money back to a lender than you’re obligated to within a month. It’s a good thing to do if you can afford it, since it’ll reduce the amount of money you owe the lender faster. Some lenders allow this where others don’t, so check your agreement to see if you’re able to overpay.
Pay monthly is another term for finance. It refers to paying for your car in monthly instalments rather than in a single payment.
A payment holiday is where a lender allows you to take a break from your repayments. This can be useful if you encounter sudden, temporary financial difficulty. Check your agreement to see if your lender allows this and how it works.
Cooling off period
With any finance agreement, you always have a cooling off period where you can change your mind about paying for your car with finance, without facing any fees or penalties. It lasts for the 14 days following the date you sign your agreement.
Normally, using your cooling off period would mean that you can change your mind about paying by finance, but you would still have to find the funds to buy the car.
Late payments are payments made outside or after of an agreed period of time. You’ll want to avoid these as many lenders charge a fee if you can’t pay your monthly payment on time and you may find it difficult to get credit in the future as a result.
If you get into any financial difficulty and are struggling to pay on time, it’s best to get in touch with your lender and work out a plan together.
Voluntary termination is a legal right built into all car finance agreements that allows you to exit the agreement early in certain circumstances. They’re useful if you find yourself in financial difficulty and can no longer make your monthly repayments.Start Search