Key Terms

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APR (Annual Percentage Rate)

The rate that allows you to compare the cost of credit between products and providers. It takes account of interest charges as well as the fees and charges included in the cost of credit.

Agreement

A contract between the finance company and yourself. It is legally binding and will detail all the key components of your deal including all interest, fees, and charges as well as your rights and responsibilities.

Amount of credit

The amount of money that you are borrowing from the finance company. This does not include any interest, charges and fees that may be charged.

Arrears

The amount that has fallen due in terms of your finance agreement that you have failed to pay on time. Can also refer to the timeline for payment of installments, where you take delivery of the car and monthly payments are taken from your account one month later rather than immediately on delivery.

Balance

The net amount that you owe after you have made a payment. For example, if you owe £10,000 and pay off £2,500, your new balance is £7,500.

Balloon Payment

A lump sum of money that may be due at the end of your finance deal that must be paid if you wanted to own the car.

Charge

Typically an administration fee payable as a charge for credit in a finance agreement. Also, if you make a late payment you may incur an administration charge that is added to your balance.

Condition Sale

A type of car finance where you agree at the outset of the agreement to buy the vehicle. The interest rate may be fixed for the full term and the amount borrowed is spread equally into monthly payments. Ownership of the car remains with the finance company until you have repaid the full amount.

Contract

A legally binding agreement between the finance company and yourself. It maps out the exact terms of the agreement including all interest, fees, and charges as well as your rights and responsibilities and the obligations of the finance company.

Contract Hire

This is an agreement in terms of which you rent the car from the finance company just as you would if you were renting a car for a day or a week. It’s a long-term rental agreement and at the end of the contract, the car is returned to the finance company. You are committed to the term and to making all payments. The finance company is always the owner of the car.

Credit Rating/Credit Score

This is an assessment of your eligibility to borrow money. The finance company will typically refer to one of the credit reference agencies to determine your creditworthiness and affordability and sustainability of any proposed finance agreement. Your credit rating goes up if you pay your bills on time and make repayments in accordance with your agreements. But it's affected negatively if you fall behind in making these payments or are not in a position to afford to take on any more.

Default

When you miss a scheduled payment due in terms of your agreement with the finance company. This is deemed a breach of contract and they may take action against you. You will be given a period of time to remedy any default before the finance company can end the agreement.

Deposit

The payment you make upfront when taking out a new car finance agreement. This goes towards the cost of the car you are buying.

Deposit Contribution

A discount or incentive offered by the finance company or car dealer that is only provided if you enter into the finance agreement. You are essentially being given money towards the cost of the car by those offering the deposit contribution.

Depreciation

The reduction in the value of the car as a result of age, mileage, government VAT charges (20%), wear and tear, etc. Your car starts depreciating from the moment you drive it off the dealer's forecourt.

Early Settlement

If you want to pay off the remaining balance on the car before the end of the finance agreement then you are entitled to do so. You should contact your finance provider and request the early settlement (a final figure required to pay off the car). On payment of the early settlement figure within the timescales provided by the finance company, you will become the owner of the car. You are also entitled to make a partial early settlement which will reduce the length of the agreement and/or the monthly payments to be made.

Equity

This is the difference between what your car is worth and the outstanding finance you still owe on the car. Positive equity means your car is worth more than you owe. For example, if your car is worth £10,000 and you still owe the finance company £7,500, then you have £2,500 of equity. Negative equity means your car is worth less than you owe. For example, if your car is worth £10,000 but you still owe the finance company £12,500, you have £2,500 of negative equity, and you have to pay that sum to clear the debt.

Excess Mileage

In certain types of car finance agreements, there will be an option to have a mileage allowance. Typically, the less annual mileage you have in your agreement, the cheaper the car finance payments will be. However, if you agree on a particular mileage and have exceeded it at the end of your agreement, you will be charged an excess mileage charge. This is calculated on the basis of the number of miles you exceed the agreed allowance multiplied by the excess mileage charge per mile. This can be a substantial sum if the agreed mileage figure is significantly less than the mileage travelled.

FCA

Financial Conduct Authority (FCA) is the regulatory body responsible for the functioning of the UK consumer credit market and it regulates and supervises finance companies providing motor finance to individuals. The FCA aims to ensure fair and honest trading markets by protecting consumers and the market.

FLA

Financial and Leasing Association (FLA) is the UK's leading trade association for the asset, consumer, and motor finance sectors. They advocate on behalf of the finance companies in the media and to the government.

Fair Wear and Tear

If you are giving your car back to the finance company then they will expect the vehicle to be returned in good condition, subject to fair wear and tear. It is anticipated that a car will suffer normal wear and tear as a result of use, but damage 'beyond normal' will have to be paid for.

Fee

An administration payment made to the finance company as part of your agreement, typically at the beginning and end of the deal, and is usually around £200-£395.

Financial Ombudsman Service

The Financial Ombudsman Service (FOS) is a free service that settles complaints between consumers and financial service providers such as finance companies who provide motor finance. There is no charge to the consumer who uses FOS.

Fixed-Rate / Flat-Rate

In the context of a finance agreement, this means that the interest rate will stay at the same level for the term of the agreement rather than changing depending on particular circumstances. It means your monthly payments will stay the same for the duration of your agreement.

GAP Insurance

Additional insurance you can choose to purchase if entering a finance agreement. It may provide covers in the event of your car being stolen and not found or written off in an accident. In general terms, this insurance may provide cover in relation to the difference between the standard car insurance settlement and either the balance outstanding on the finance agreement or the original invoice price of the car.

GFV/GMFV

Guaranteed (Minimum) Future Value is the minimum value that the finance company guarantees in relation to the car at the end of the agreement. This is relevant in relation to a PCP agreement and is calculated based on the term of the agreement and total mileage. The finance company will not be obliged to pay you the GMFV if the car is in poor condition and/or doesn’t have a full service history. This is equal to the balloon you have to pay if you want to keep the car.

Guarantor

This is someone who will be liable to pay your car finance payments if you are unable to or simply stop paying for any reason. It's a legally binding contract and is typically necessary if a younger person applies with little to no credit score, or a buyer who has failed to make payments in the past or has little income.

HP (Hire Purchase)

This is one of the more popular and straightforward finance agreements. You don’t own the car until you have paid all sums due in terms of the hire purchase agreement. You are essentially paying in agreed monthly installments until the total amount payable is repaid. The interest rate is generally fixed.

Halves

If you have entered into a hire purchase or conditional sale agreement in relation to a car, you are entitled to terminate the agreement and return the car to the finance company. Provided your payments are up to date, you have paid one half of the Total Amount Payable in terms of the agreement and have taken reasonable care of the car, you will not have to make any further payments. You can find this one-half figure in every hire purchase and conditional sale agreement.

Installment

When you pay your car finance on a monthly basis, you are paying in installments rather than one lump sum.

Interest

Interest is the amount of money the finance company requires you to pay as the cost of borrowing. The interest payable in terms of a motor finance agreement is calculated by applying the interest rate to the amount of credit over the length of the agreement.

Interest Rate/Flat Rate

The rate at which you pay interest to the finance company with interest being calculated by applying the rate of interest to the amount borrowed. This is typically fixed over the duration of the loan meaning you should know exactly how much you are paying each month. You pay more interest the longer it takes you to pay back the loan. For example, if you take finance over four years, you may be paying less per month but over time you’ll pay more interest than you would on finance over two years, provided the amount of credit and the interest rate is the same.

Invoice Price

The total price, including VAT, paid by the finance company to the dealer to purchase the car, including additional amounts such as road tax and additional features you may have asked for.

LP (Lease Purchase)

A form of Hire Purchase (HP) which may include a large balloon payment at the end of the agreement. This is not a particularly popular option in the UK anymore as most people typically go for an HP or PCP.

Lease

An alternative name for a hire agreement. When you hire the car, the finance company has ownership of the car at all times. At the end of your lease, you must return the car to the finance company.

Logbook Loan

When taking out a logbook loan, you sell a car you own to a finance company who then rents it back to you. It is a form of cash loan using your car as security. It is sometimes used by people with a poor credit score that may be unable to get a personal loan from a bank. At the end of the agreement, you have the right to buy the car back from the finance company. If you fail to keep up your payments, however, the finance company may be able to take your car and sell it, having an impact on your credit rating. This type of loan is not available in Scotland.

Logbook Loan

When taking out a logbook loan, you sell a car you own to a finance company who then rents it back to you. It is a form of cash loan using your car as security. It is sometimes used by people with a poor credit score that may be unable to get a personal loan from a bank. At the end of the agreement, you have the right to buy the car back from the finance company. If you fail to keep up your payments, however, the finance company may be able to take your car and sell it, having an impact on your credit rating. This type of loan is not available in Scotland.

Maintenance

Many agreements will include the cost of maintenance services in your monthly payments. This will not necessarily save you money, but it will avoid costly lump sum payments.

Mileage Allowance

This is the total number of miles per year you expect to travel in the car which is agreed before you sign your agreement. PCP deals, in particular, are based on the finance company taking back control of the car at the end of the term and therefore they need to be able to calculate the end value of the car. If you exceed the agreed mileage, you could be charged an excess mileage charge.

On-Road Price

This is the total price of your car. That means the car itself plus road tax, number plates, any factory delivery costs, and optional extras selected by you.

Option to Purchase Fee

In a hire purchase agreement, you do not commit to purchasing the car at the outset of the agreement. The option to purchase fee is paid to transfer ownership of the car to you after you have paid all other sums due in terms of the agreement.

Overpayment/Additional Payment

Finance companies must allow you to make payments in addition to your regular monthly payments. Consequently, it will reduce your total amount payable and shorten your term and/or lower your monthly payment total. Your agreement will provide information as to how you can make partial early settlements.

PCP (Personal Contract Purchase)

This is the most popular way to take out a car finance agreement in the UK. It is ideal for those that want to change their car regularly and make lower monthly repayments. It’s a variation of a Hire Purchase but instead of repaying the entire cost of the vehicle, you only pay for the depreciation of the car. At the end of the agreement, you can choose to make the final balloon payment to own the car outright or hand the car back to the finance company with no further liability, provided you have taken care of the car and have not exceeded the mileage allowance.

PPI (Payment Protection Insurance)

This is a type of insurance designed to protect and cover repayments when, for specified reasons, you cannot make them yourself. For example, payments may be made on your behalf if you can no longer afford to make your regular repayments due to losing your job or you cannot work due to an accident, illness, disability, or death. The terms of any policy should be checked carefully to ensure its suitability to your circumstances and needs.

Personal Loan

This a type of loan that a bank or other lender makes that is not secured against your car. It is often called an ‘unsecured loan’. You can use this loan to buy a car so that you own it from the outset, unlike an HP or PCP where the finance company owns the car until all sums due in terms of the agreement are paid. You will still have monthly repayments to make to the lender of the personal loan. Failure to make payments on time, even missing by just a few days could seriously impact your credit rating.

Pre-Contract/Pre-Credit Contract Information

This document details the key terms of your finance agreement and must be provided to you before you sign the finance agreement. The car dealer will provide these documents to you to read and understand before you fully commit to the finance agreement.

Quote/Quotation

A car dealer must be able to provide official written confirmation of the relevant information prior to you legally confirming or signing any agreement.

Re-finance

Refinancing refers to the process of taking out a new loan to pay off one or more outstanding loans. Borrowers usually refinance in order to receive lower interest rates or to otherwise reduce their repayment amount.

Residual Value

This is the estimated value of the car at the end of the finance agreement, taking its age, mileage, and overall condition into account, as well as anticipated market conditions. Finance companies predict the residual value of the car at the end of the agreement on a calculated formula of its depreciation.

Settlement

Repayment of all outstanding sums due in terms of a finance agreement.

Term

This is the length of your finance agreement and can typically be between 1-5 years depending on which type of finance plan you take on.

Thirds

Once you have paid over one-third of the Total Amount Payable in terms of a hire purchase or conditional sale agreement, the car becomes ‘protected’. This means that the motor finance company can not repossess the car unless they have your informed consent of a court order. Until you have made payment of one-third of the Total Amount Payable, the finance company can repossess the car if you stop making payment, the agreement has been terminated, and the car is on the public highway.

Total Amount Payable

This is the total cost of the car that you must pay. It includes the deposit paid, the amount borrowed, and all charges, fees, and interest.

Unsecured Loan

A personal loan is a type of unsecured loan. It is a contract in terms of which you borrow money from a bank or other financial institution to help you purchase a car in full so that you own it from the outset, not a finance company. If you cannot afford to repay the loan, your credit rating is likely to be affected and in extreme cases, the lender may seek to make you bankrupt.

VT (Voluntary Termination)

If you have entered into a hire purchase or conditional sale agreement in relation to a car, you are entitled to voluntarily terminate the agreement and return the car to the finance company. Provided your payments are up to date, you have paid one half of the Total Amount Payable in terms of the agreement and have taken reasonable care of the car, you will not have to make any further payments. You can find this one-half figure in every hire purchase and conditional sale agreement.

Variable Rate

This is where the interest rate can fluctuate up and down throughout your agreement and is not fixed for the length of the agreement. It means that your monthly repayments could be different every month depending on the rate at the given time of payment. It is quite unusual for variable rates to be used in car finance agreements.

Voluntary Surrender

If you cannot afford to pay the monthly repayments due in terms of a hire purchase or conditional sale agreement, you can agree to hand the car back to the finance company. The finance company will then sell it at a trade auction and reduce your liability in terms of the agreement by the sale price obtained. There may be a remaining balance outstanding which you will remain liable to pay.