Jargon Busting: Car Finance

When purchasing a new car, understanding car finance terminology can be difficult to get your head around, whether you’re a first-time buyer or purchasing the latest model. But there’s no need to be put off by this, our simple guide aims to help you get to grips with it all.

A

  • Annual Percentage Rate (APR) – The interest you are being charged to borrow money for your finance agreement, including any fees that you may be charged, expressed as a percentage. The higher the APR rate, the more you’ll pay overall.

B

  • Balloon Payment (also known as the ‘optional final payment’) – When entering a finance agreement, the lender will predict what the car’s value will be at the end of the contract. That value is given as the ‘balloon’ or ‘optional final’ payment. If you decide to pay it, you will own the car. If not, you can trade the car in for another the dealer has, using your original deposit.

C

  • Cash Price
    This is simply the price of the car, likely to be less than the total cost of the car if on finance due to interest rates.

D

  • Demonstrator (also known as “demo”) – A display model which later may be put up for sale. These cars may have been driven by potential customers on test drives or by dealership staff and are likely to have covered a few thousand miles – as a result, they’re sold at a discounted price compared to brand new models.
  • Deposit Contribution – Car dealers and manufacturers sometimes offer a contribution that goes towards the cost of the car, usually offered with a particular finance deal. Deposit contributions can be quite large, reducing the amount you may have to pay monthly.
  • Depreciation - The value your car loses over time. In the case of a PCP deal, you’re paying for the depreciation over the length of the contract, so buying a car with a low depreciation rate will cost you less per month.
  • Diamondbrite – A range of protective products which are designed to maintain the new look of your vehicle and protect your car from the elements. Some Diamondbrite products include Paint Protector, which forms a transparent protective barrier on your car’s paintwork, and Fabric Protector which coats each fibre of the fabric and carpet in the interior of your car and repels stains.

E

  • Early Settlement - Also known as redemption or early repayment, it is the amount to pay should you decide to pay off the loan early. The lender will provide a settlement figure, which is likely to include an early repayment charge. That said, early settlement could save you some money, as there may be less interest to pay.
  • Excess Mileage Charge – The amount you pay at the end of a finance agreement for each mile more than the contracted mileage.

F

  • Fixed-Rate Interest - A set interest which remains unchanged throughout the term of the finance agreement.

G

  • GAP Insurance – There’s no obligation to purchase GAP insurance when financing your car but it may be worth considering. It covers the difference between the car’s market value and the remaining amount of finance left to pay if the car is written off or stolen.
  • Guaranteed Minimum Future Value (GMFV) - What the car will be worth at the end of the finance agreement. GMFV is estimated based on the length of the contract, total mileage covered and market trends. It is based on the idea that you stay within the mileage allowance and keep the car in good condition.

H

  • HP – Hire Purchase is a finance method where you normally pay an initial deposit and pay off the entire value of the car in the monthly instalments. When all the payments are made, the Hire Purchase agreement ends, and you will own the car outright.

M

  • MPG – Miles Per Gallon is a unit of measure for a car’s fuel economy, indicating how many miles a car can go on a gallon of fuel. EG, a car listed as getting 46.7mpg can travel 46.7 miles with a gallon of fuel.

P

  • Part Exchange – Using the value of your current car as a contribution towards the deposit of your new car which can reduce your monthly payments. The value of your part exchange depends on several factors such as the car’s age, condition, service history and current market value.
  • PCP– Personal Contract Purchase is a finance product where you usually pay an initial deposit, followed by monthly instalments over a term typically between 18 to 48 months. Monthly instalments pay off the depreciation of the car and not its entire value over the term of contract. When you get to the end of your agreement, there is a final balloon payment that must be paid if you want to keep the car.
  • Pre-Reg – Buying a Pre-Reg car is like buying a new car, except that it has already been registered before it goes on sale. This means the warranty of the car may have already lost a few months as it begins the day that it is first registered. Physically, it will be no different to a brand-new car and you will still be the first person to use the car. However, you might find that the cash price is lower than the equivalent new car.

T

  • Term Length – The total duration of the contract agreement in month which can vary between 24 and 60 months.
  • Total Amount Payable – The total cost of the car, including the loan itself, the total amount of interest and any fees. This means that is it likely to be significantly higher than the price you would pay if you bought a car outright in cash.

V

  • VIN number – Vehicle Identification Number, every car has a unique 17-digit number which is an identifier for that vehicle. You can usually find this number at the base of the windscreen or on the chassis of the car. It is important as it increases the likelihood of finding a stolen vehicle because this number can be used to track the car down as it cannot be changed.