Car Finance Jargon Explained – Most Used Ones

Car finance is a popular option for anyone looking to buy a new car. But when you first start researching car finance, you may find that there are a lot of confusing terms that you don’t understand. Here’s a guide to car jargon so you can understand better what it all means.

Hire Purchase

Hire Purchase, or HP is one of the most common types of financing options. With this, you put down a deposit, then you make fixed payments each month over a period of time. Once you have paid off the debt, you become the legal owner of the vehicle.

Personal Contract Purchase

Personal Contract Purchase, or PCP, is another common financing option where you pay back the finance in monthly payments after making an initial deposit. At the end, you can make a balloon payment in order to own the car. You can also use your car as part of a deposit on another deal, or you can walk away.

The key difference from HP is that the initial deposit is offset by the car’s expected value once the agreement ends, so the monthly repayments are often lower than with a Hire Purchase agreement.

APR

APR stands for Annual Percentage Rate, which is essentially the interest rate. This is the amount that you will pay back in interest on an annual basis.

Balloon Payment

The Balloon Payment is the name given to the final payment that you can make at the end of some agreements in order to take ownership of the vehicle.

Early Settlement

This is the term given when you decide to end a finance agreement early. This is something you can normally do after 50% of the total amount has been paid.

Annual Mileage

When you enter a finance agreement, you will be given a total mileage that you have to stick to. If you go over the mileage, you will normally have to pay a set amount per mile.

Guarantor

When you enter a car finance agreement, you may need to provide a guarantor. This is the person who takes responsibility for the debt if you are unable to make the repayments.

Total Repayable

This simply refers to the total amount that is due to be paid to the lender, including the loan, interest and fees.

Gap Insurance

This is a type of insurance that pays the difference between the market value of the car and what you owe on it. It comes into play if your vehicle is written off or stolen, because the insurer only pays the current market value. If this is less than the amount you owe on the loan, you will have to make up the difference, which is where you can use gap insurance.

GFV

GFV stands for Guaranteed Future Value, which is the amount that the car is worth at the end of the finance agreement.

Cooling-Off Period

The Cooling-Off Period is a 14-day period after you have entered into a finance agreement when you have the right to withdraw from it.

Deposit Contribution

This is a deposit that may be provided by the dealer or the manufacturer that goes towards the finance agreement, and it is often over £1,000.

Understand the Jargon

Car finance can be confusing when you are first starting out, and a lot of that is down to the unfamiliar terms. Hopefully, you will now have a better idea about the jargon, which will help you to make a more informed decision.

But remember, if you have any questions, always your lender to make sure you fully understand the details of your car finance agreement.

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REPRESENTATIVE FINANCE EXAMPLE:

Borrowing £7,500 over 4 years with a representative APR of 27.9%, an annual interest rate of 27.9% (Fixed) and no deposit, the amount repayable would be £244.77 per month, and total cost of credit would be £4,248.96 and the total amount payable would be £11,748.97*

*Your rate may differ from the above illustration due to your individual circumstances. All credit subject to status.

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