Car Finance Terms Explained

finance_gloassary

Thinking of buying a car but don’t speak the language of loans? Check out our handy car finance glossary writes Geraldine Herbert

 

APR  – Short for Annual Percentage Rate. This is the amount of interest charged on the loan, including any fees. All lenders must calculate the APR in the same way so it is not only the best way to compare loan providers but it shows how much you’re actually going to pay over the period of the loan.

 

Balloon Payment – Some loan agreement leave a substantial portion of the amount borrowed outstanding until the end of the term, this final amount is referred to as the balloon payment. The idea is that by deferring a large part of the loan until the end your monthly payments are reduced. (See also Guaranteed Future Value.)

 

Credit agreement – The contract between the borrower and lender. You get the car, and agree to pay for it over a set period of time.

 

Credit rating, history and record – Before approving a loan,  you lender will want to know you are a in a position to repay the loan and have not defaulted on loans in the past. To do this they will look at your credit history i.e. your previous borrowing, employment history, earnings and whether or not you own your own home. Factors like these determine your credit rating and the better your credit rating (or score), the more likely it is that they’ll be willing to lend to you,

 

Depreciation – This refers to the value your car loses over time due to mileage, wear-and-tear and ageing.

 

Flat rate – The monthly interest rate charged on the amount borrowed over the term. Do not choose a loan based on this rate, always go by APR.

 

Fixed Rate – A fixed rate means that your monthly payments are unaffected by interest rate changes and will remain the same.

 

Hire Purchase (HP)- Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit upfront (often 10%) and then pay the rest off in monthly installments over an agreed period. After the last payment you own the car. It is worth remembering with any HP contract, be if for a 3 piece suite, sound system or a car is you do not own the asset until the final payment is made. Two years down the line and £5,000 later if you can t keep up the payments you stand to lose both the car and all the money you have spent thus far on it.

 

Guaranteed Future Value (GFV)  – This is the minimum amount a lender decides a car will be worth at the end of a PCP agreement and  is calculated based on the predicted residual value of the car and is agreed at the start of the contract. It is important to be happy with this amount that is agreed as this figure has in role in determining what your monthly repayments will be and will be the amount you will have to pay at the end of the term if you decide to buy the car outright

 

Part exchange – When you use your existing car as part-payment for a new one.

 

Personal Contract Purchase – Known as a PCP for short, with a Personal Contract Purchase  you pay an initial deposit of between 10 per cent and 30 per cent, which is typically funded by a trade-in of your existing car . The lower the deposit the higher the monthly repayments. The dealer agrees a fixed amount known as the minimum “guaranteed future value”  which is essentially an estimate of the car’s value at the end of the PCP contract. The monthly repayments are then based on the difference between the purchase price of the car, minus the deposit, and the minimum guaranteed future value.  Interest rates depend on make and model. However unlike HP or a bank loan  at the end of the agreement you have the choice of whether to make that final payment or not.

 

Personal loan – A personal loan is a loan that is granted for personal use for whatever you want to spend the money on. These types of loan are usually unsecured (i.e. not linked to an asset like a car or your home) and is based on your ability to pay back the loan

 

Residual value – the amount your used car taking into account depreciation, condition and mileage.

 

Term – The length of the contract or loan, usually between 12 and 60 months, the loan will be repaid in full.

 

Variable rate – If the interest rate charged can go up/down with normal interest rates during term of the loan, then the rate is called a variable rate.

 

Geraldine Herbert

2nd October, 2017

Author: Geraldine Herbert

Motoring journalist Geraldine Herbert is the founder of wheelsforwomen. A jury member for the International Women’s World Car of the Year, she has been a motoring journalist for over ten years and is the motoring expert for Good Housekeeping Magazine and their “Women at the Wheel” section of goodhousekeeing.co.uk. You can follow Geraldine on Twitter at @GerHerbert1

Share This Post On