Car Finance Jargon Explained In Simple Terms
Applying for car finance can be daunting for some car buyers, especially when they start seeing technical terms about the deal. Car finance can help you buy your dream car so don’t let those unfamiliar words scare you away from a good finance arrangement. We’ve gathered together some of the common car finance jargon you’ll most likely encounter when reading, researching, or applying for car finance. By the time you’re done, you’ll feel more confident about your car finance knowledge.
We've got a handy video on this one too! Check out part 1 for some of the most common car finance jargon... explained! Watch it here 👇
Administration Fee
This fee is also called the “acceptance fee” and is charged at the beginning of your car finance agreement to cover the cost of registering your arrangement with the lender onto their system, issuing paperwork or digitising them, and other processes in setting up your finance deal.
Find out more about administration fees here
Agreement Term
The length of time over which you have agreed to repay the lender for your car finance is called the agreement term. On average, the term for most car finance deals is three years but you can negotiate it to be shorter or longer.
Find out more about agreement terms
Annual Mileage
When we say annual mileage in the context of car finance, this is the limit of the number of miles you can use the car every year. If you exceed the annual mileage, you will have to pay excess charges. It’s best to know your average mileage so you can calculate whether you can stick to the limit stated in your agreement.
Find out more about the annual mileage
Annual Percentage Rate
Shortened to APR, this is another term for the car finance interest rate that includes interest as well as other fees for your finance deal. You can use the APR to compare different deals from various car finance companies.
Find out more about the annual percentage rate (APR)
Arrears
If you’ve ever missed payments, the overdue amount that you owe is called arrears. When you are in arrears, it means that you’re behind the payment schedule for your car finance agreement. Failure to make car payments could see your vehicle repossessed.
Find out more about car finance arrears
Balloon Payment
When you get a Personal Contract Purchase (PCP) deal, you will have the option to return the vehicle at the end of your contract or pay an optional final payment. This is called a balloon payment, and once you've paid it the car is 100% yours.
Find our more about balloon payments
Broker
A broker is an independent party who can arrange an agreement or deal between two groups. In car finance, a broker can arrange your car finance agreement with the lender on your behalf. They will be the ones to talk to the lenders and find the best deals for you.
Cooling Off Period
A cooling off period refers to the 14 days given to you to withdraw from a car finance agreement. The 14 days begin once you sign the car finance contract. This is applicable to all types of finance agreements, whether you applied for them in person or through the internet.
Find our more about the cooling off period
Credit Application
A credit application is when a borrower requests approval for credit from a lender. Today, a borrower can apply for credit online using their computer or smartphone, and they can find out about the result of their application almost instantly.
Find out more about your credit application
Credit History
Your credit history is the record of your previous and current debts. Lenders check it to see how responsible you are in repaying your loans, credit cards, and other obligations with financial institutions like banks, lending companies, credit card companies, and others.
Find our more about your credit history
Credit search
Credit searches are performed by the finance company, either as a soft or hard search. A soft search won't show up on your credit report, meaning it's not visible to lenders. A hard search will show up, and too many of these at once looks like you're applying for several lines of credit at the same time. Companies only tend to perform a hard search once you begin the finance application.
Find out more about credit searches
Credit Rating
Also known as “credit score,” this term is a number illustrating how well you fulfil your financial obligations. The score or rating is based on the credit history you have, and lenders consider your credit rating whenever you’re applying for loans like car finance. The higher your score, the better your chances of getting approved.
Find out more about credit ratings
Default
When a borrower defaults on their car loan, it means that they have stopped making their monthly payments to the lender. Usually, a borrower has "defaulted" on their loan after three missed payments or 90 days. The consequence of a default is that the lender now has the right to repossess the vehicle you're using.
Deposit
The deposit is your initial downpayment which you’ll pay at the beginning of your finance agreement. When you pay a larger deposit, the monthly repayment amount could go significantly lower. Also, you will have better chances of getting approved for your car finance application if you pay a deposit.
Early Settlement
Another term for this is “early repayment.” It is when you choose to end your car finance agreement early by paying the rest of the amount you owe the lender. If you want to have an early settlement, get in touch with the car finance company so you can get a settlement figure. Bear in mind that you might have to pay an early repayment charge.
Find out more about early settlements
Equity
When you have made all the payments for the car on finance, it then becomes your asset, which is called equity. You may have either a positive or negative equity. For example, if the car’s value (say, £10,000) is less than the amount you owe (£14,000 as an example), then you’d have a negative equity of £4,000.
Financial Conduct Authority
The FCA is the official body responsible when it comes to the regulation of UK financial services. It is a body separate from the government and was established to ensure consumers get fair deals from financial institutions such as car finance companies.
Find out more about financial conduct authority
Finance Agreement
This agreement is what covers the terms included in your car finance contract. You’ll be able to see what your monthly payments are, the cancellation terms, and other important details while you’re under a contract with the car finance company as well as what happens once your contract is finished.
Find out more about finance agreement
Fixed-rate Interest
This is the rate of interest that you’ll pay every month during the duration of your contract with the lender. Since it is fixed, it will be the same rate throughout the contract term. This rate tends to be a bit higher compared to variable interest rate loans but the advantage of a fixed rate is that you won’t have to worry about it getting too high that you won’t be able to pay it.
Find out more about fixed-rate interest
GAP Insurance
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.
Hard Credit Search
When you apply for car finance, the lender will conduct a thorough and in-depth check on your financial history through your credit report. They will know if you've paid previous loans on time or if you had missed payments. They will also know which lenders have extended credit to you before. A hard credit search will leave a record on your credit report and other lenders will be able to see it.
Hire Purchase
HP is a type of car finance arrangement just like the PCP deal. However, HP monthly payments are higher since you won’t need to pay a balloon interest at the end of your contract if you want to own the car. Once you’ve finished making all payments, the car is yours to own.
Find out more about hire purchase
HPI Check
HPI stands for Hire Purchase Investigation. Through an HPI check, you will be able to know various information about a vehicle, including outstanding finance, write-offs, theft, mileage, previous owners, number plate changes, chassis numbers, MoT status, road tax, and others.
Find out more about HPI checks
Late Fee
Late fees refer to a charge that the borrower has to pay if they fail to make their payments on time. For missed payments, the lender will add a late fee to the borrower's outstanding balance which then increases in the following month.
Option to Purchase Fee
The "option to purchase" fee is a voluntary payment that the borrower makes at the end of their car finance agreement. Once they have paid this fee, the lender will transfer the ownership of the car to the borrower.
Find out more about option to purchase fee
Outstanding Balance
The outstanding balance refers to the amount you still owe on your car finance agreement. The amount will vary depending on the kind of car finance product you've chosen. If you selected one with a fixed interest rate, then the total amount will be determined at the beginning of the car finance agreement, so the outstanding balance includes the total amount you owe. For deals with variable interest rates, the outstanding balance will most likely show the amount you owe but not the accumulated interest throughout the agreement.
Find out more about your outstanding balance here
Overpayment
Overpayment in car finance is when you pay an extra amount on your loan that is above your fixed monthly payments. Overpayment helps in clearing your loan faster and could also help in reducing the interest you'll be charged throughout the loan term.
Part-exchange
Part-exchange is an arrangement where you’ll trade in your old car for a new one. The old vehicle’s value will go into the deposit you need to pay for the new car. Depending on many factors that affect how much a car is worth, it’s possible you won’t need to pay a deposit anymore. In most cases though, the value of the old car will be subtracted from the deposit you need to pay and then you would only have to cover the difference.
Find out more about part exchange here
Partial Settlement
A partial settlement is a borrower's agreement with the lender about paying a certain amount that is less than the actual debt they owe. It will then be recorded on the credit report as a "partial settlement." Even if the borrower no longer has to pay the remaining amount, it will still reflect that the loan or debt was not fully repaid.
Find out more about partial settlement here
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 deals are another type of car finance arrangement where you’ll have a lower monthly payment amount than HP. You may return the car at the end of the contract and not pay any more fees unless you exceeded your mileage limit or the car incurred some damage. You also have the option to buy it by paying the optional balloon payment.
Read more about PCP deals here
Residual Value
In car finance, residual value pertains to the resale value of the vehicle at the end of the contract. The car finance company calculates the estimated residual value of the car at the beginning of your agreement with them. It is a major factor when it comes to setting the fixed amount you have to pay every month. To determine the residual value of a car, the lender considers several factors such as the Annual Mileage Limit, Term Length, and the Depreciation of the vehicle throughout your contract.
Understand more about Residual Value here
Soft Credit Search
A soft credit search is when you or a lender checks your credit report, seeing only a top-level view of your credit history. A soft check on your credit report won't leave a record on your file, which means other lenders won't know about it. This kind of credit search won't have an impact on your credit score as well.
Total Amount Repayable
This is a term for the amount you have to pay to buy a vehicle through a car finance agreement. It does not include discounts and deposit contributions from the car manufacturer or dealer. The total amount repayable is how much you need to pay when borrowing a certain amount based on the interest rate and fees detailed in the car finance contract.
Read more about the importance of knowing the total amount repayable
Transfer Fee
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.
Variable Rate Interest
This interest is the opposite of the fixed-rate interest since the lender can change the rate. With the variable rate interest, the amount you need to pay may differ from one month to the next. While it is lower compared to the fixed-rate interest, it’s possible that it may increase and consequently make your repayment amount higher as well.
Find out more about variable interest rates here
Voluntary Termination
Voluntary termination in car finance refers to the legal right of the borrower to cancel the car finance agreement early. To do this, the borrower needs to return the car. They will be liable for half the overall agreed finance amount, including any fees, arrears, and charges whenever applicable.
Find out more about voluntary termination conditions here
Takeaway
These are some of the common car finance jargon phrases you’ll encounter when applying for or reading about car finance. There’s no reason to be daunted by these terms because car finance companies like Carmoola are more than happy to help you out if anything is unclear to you. Be sure to get in touch with us if you want to know more about our car finance deals! 👍
