Car Finance Jargon Buster: Terms Every Buyer Should Know

Stepping onto a car dealership forecourt can sometimes feel like entering a foreign country where everyone speaks a different language. Terms like 'APR', 'balloon payment', and 'equity' get thrown around, often leaving buyers confused and uncertain.

At Carlingo in Harrogate, we believe that an informed customer makes better decisions, which is why we've created this jargon buster to help you navigate the sometimes complex world of car finance.

 

Essential Car Finance Terms

APR (Annual Percentage Rate)

Perhaps the most important figure to understand when comparing finance deals. The APR represents the total cost of credit over a year, including interest and standard fees, expressed as a percentage. A lower APR means you'll pay less for your finance. Always compare APRs rather than just the monthly payment to understand the true cost of different finance options.

PCP (Personal Contract Purchase)

One of the most popular finance options in the UK today. With PCP, you pay an initial deposit followed by fixed monthly payments over an agreed term (typically 24-48 months). At the end of the agreement, you have three options: pay a final 'balloon payment' to keep the car, return the vehicle with nothing more to pay (subject to mileage and condition), or use any equity to put towards a new vehicle.

HP (Hire Purchase)

A straightforward finance option where you pay a deposit followed by fixed monthly payments that cover the total cost of the vehicle. Unlike PCP, there's no large final payment, and you automatically own the car after making your final payment. HP typically results in higher monthly payments than PCP but provides outright ownership sooner.

Balloon Payment (Optional Final Payment)

The pre-agreed lump sum that's payable at the end of a PCP agreement if you wish to own the car outright. This figure is calculated based on the vehicle's predicted value at the end of the agreement, also known as the Guaranteed Minimum Future Value (GMFV).

GMFV (Guaranteed Minimum Future Value)

The amount the finance company predicts your car will be worth at the end of a PCP agreement. This forms the basis for calculating your balloon payment and protects you against unexpected depreciation.

GAP Insurance (Guaranteed Asset Protection)

An optional insurance product that covers the difference between what your car insurer pays out if your vehicle is written off or stolen, and either what you paid for it originally or what you still owe on finance (depending on the type of GAP insurance).

Equity

In car finance terms, equity refers to the difference between what your car is worth and what you owe on it. Positive equity means your car is worth more than you owe, which can be useful when trading in for another vehicle. Negative equity means you owe more than the car is worth.

Deposit Contribution

A financial incentive offered by the dealer or manufacturer that contributes towards your initial deposit. This effectively reduces the amount you need to borrow, resulting in lower monthly payments.

Flat Rate

A method of calculating interest on the full loan amount throughout the agreement, regardless of repayments made. The flat rate is usually lower than the APR but doesn't reflect the true cost of borrowing. Always focus on the APR for accurate comparisons.

Fixed and Variable Interest Rates

A fixed rate means your interest rate and monthly payments remain the same throughout the agreement, providing certainty for budgeting. A variable rate can change, usually in line with the Bank of England base rate, meaning your payments could go up or down.

 

Understanding the Application Process

Credit Score

A numerical representation of your creditworthiness, based on your financial history. Lenders use this to assess risk when deciding whether to approve finance and what interest rate to offer. The higher your score, the better terms you're likely to receive.

Hard and Soft Credit Checks

A soft check allows lenders to view your credit history without leaving a visible footprint that other lenders can see. A hard check is a formal application that remains visible on your credit file. Multiple hard checks in a short period can negatively impact your credit score.

Agreement in Principle

An initial approval from a lender indicating they're likely to provide finance based on the information provided. This doesn't guarantee final approval but gives you a good indication of what you can afford.

Underwriting

The process by which a lender assesses the risk involved in offering you finance. This involves reviewing your credit history, income, outgoings, and employment status.

 

Key Contract Terms

Early Settlement Figure

The amount required to pay off your finance agreement before the scheduled end date. This typically includes a reduction in the total interest payable but may include early repayment charges.

Default

Failing to meet the terms of your finance agreement, typically by missing payments. Defaulting can result in additional charges, damage to your credit score, and potentially repossession of the vehicle.

Secured Loan

Most car finance agreements are secured against the vehicle itself, meaning the lender can repossess the car if you fail to make payments as agreed.

Voluntary Termination

Your legal right to end a PCP or HP agreement early once you've paid 50% of the total amount payable. You return the car and have nothing more to pay, provided the vehicle hasn't been damaged beyond normal wear and tear.

Conditional Sale

Similar to HP, but ownership of the vehicle only passes to you when certain conditions are met, usually making all the payments and paying any option-to-purchase fee.

 

Specialised Finance Options

Lease Purchase

A finance product primarily aimed at businesses, combining elements of leasing and purchasing. You make monthly payments and a final balloon payment at the end to own the vehicle.

PCH (Personal Contract Hire)

A long-term rental agreement rather than a finance product. You never own the car but simply pay a deposit and monthly payments for the privilege of using it. At the end of the agreement, you return the vehicle.

Bad Credit Finance

Specialised finance options for those with poor credit histories. These typically come with higher interest rates to offset the increased risk to the lender.

 

At Carlingo, We Speak Your Language

Understanding these terms puts you in a stronger position when shopping for your next car. At Carlingo in Harrogate, our finance specialists pride themselves on explaining options clearly and finding the right solution for your individual circumstances.

We believe in transparency throughout the car buying process, which is why we're always available to talk through any terms or concepts you're unsure about. Our goal is to ensure you drive away in the right car, with the right finance package, and complete peace of mind.

Visit us today at our Harrogate showroom, where we'll cut through the jargon and help you find your perfect car with finance that fits your budget.

 

Carlingo - Quality cars, exceptional service, and finance made simple