A Simple Guide to Car Finance Jargon
Many car finance companies and banks say that applying for car finance is easy, and that’s actually true. Today, getting car finance is so simple that you can do it on your smartphone! No need to go to a bank to fill out forms and wait for calls. However, once you start reading the contract, you see car finance terms that can be confusing and intimidating. Let us help you with that with this car finance jargon buster!
Annual Percentage Rate (APR)
The annual percentage rate or APR indicates the interest you need to pay for your car loan annually. Along with the interest rate, the APR can also include other charges like administration fees that you also need to pay over the course of your loan period.
You’ll encounter the term “balloon payment” if you decided to get a Personal Contract Purchase (PCP) car finance. With a PCP agreement, you will have the option to buy the car at the end of your contract. To do this, you have to pay a final lump-sum payment called a balloon payment.
Equity is the term used for the difference between the car’s current market value and the amount you owe on it, with the assumption that the car’s value is higher than what you still owe. At the end of your PCP contract, if the vehicle’s value is worth more than the minimum Guaranteed Future Value (GFV), then this equity is something you can use as a deposit for another car loan.
This kind of insurance exists to pay the difference between the vehicle’s current market value and what you still owe on it. Gap insurance is used in the event that the vehicle is written off or stolen.
The insurer only pays the policyholder the car’s current market value. If this amount is less than that of the outstanding loan, then you would have to make up the difference, which is what the gap insurance is there for.
Guaranteed Future Value (GFV)
The GFV is a term you’ll see in PCP deals where each vehicle has a guaranteed future value. What this means is that by the end of your car finance contract, the lender has an expectation that the vehicle will be worth a certain value. You, as the borrower, can own the car simply by paying the said amount.
However, if the vehicle has depreciated more than what the lender expected, then it will be worth less than the guaranteed future value. You do not have to buy the car so you are not at risk. You can simply return the vehicle and not pay anything else.
Hire Purchase (HP)
Hire Purchase is a type of car finance agreement. You, as the borrower, will have to pay a deposit and monthly payments to own the car of your choice. When your contract ends and you’ve paid the monthly repayment amount diligently, then the car is yours. Hire Purchase is different from Personal Contract Purchase because there is no balloon payment at the end of your contract. If you plan to buy a second hand car, always perform an HPI check to ensure any previous debt secured against the car has been cleared!
You’ll often see the term “mileage limit” in PCP and leasing agreements. The price of these car finance deals usually depends on how much the car will be used by the borrower. The lender will set annual mileage limits and you need to stick with them. If you ever go beyond the limit, then you would have to pay penalty fees.
Personal Contract Hire (PCH)
PCH is a type of car finance agreement where you’ll rent a car long-term. You also have to pay a monthly fee to lease a car. Commonly, brand new cars are leased for a couple of years and then you can get another brand new model with a new PCH deal when your contract ends.
Personal Contract Purchase (PCP)
PCP is a form of car finance that’s popular among people who are not yet sure if they want to buy a car. It starts by making a deposit and paying a fixed monthly repayment amount over a set number of years.
At the end of your contract, you can buy the car by paying the balloon payment. You may also use any equity left in the vehicle as part of the deposit for a new PCP deal. The last option is you can return the vehicle to the lender and not pay anything else.
Transfer fees are usually included in Hire Purchase agreements. Depending on the car finance company, you may have to make a payment for the transfer fee so that you can own the car. The transfer fee is payable on top of the initial deposit and monthly payments that you’ve already made.
These are the common car finance jargon you’ll encounter when applying for car finance. As you can see, they’re not that intimidating. If you’re talking with a car finance representative and they start using terms that are not familiar to you, don’t hesitate to ask them what they mean. They’re there to help you gain a full understanding of the car finance deal before you sign any contract. Remember not to agree to anything that you don’t fully understand. Ask questions as much as possible!