Car Finance Jargon Buster

David Allan

Written by David Allan on September 5, 2019

Updated September 5, 2019

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Arranging car finance isn’t always easy, and when you are exploring all your options, the chances are you will come across some financial jargon that you just don’t understand. It is vital that you know exactly what you are looking at it when it comes to your finance agreement, so you know what it is that you are signing up for.

A car finance agreement is a legally binding contract and knowing what everything within it means can save you some trouble further down the line. We have created this car finance jargon buster to help you learn your APRs from your PCPs.

Administration Fees

The administration fee is the cost involved with setting up a car finance agreement. This is a charge that must be paid to cover the cost of the relevant paperwork and administration that goes into creating the finance deal. Most providers will include the administration fee in the final amount payable, and some may refer to it as the documentation fee.

Agreement Term

This is referring to the length of the finance agreement. It is the length of time that you will need to be making repayments for until the total amount is paid off. Sometimes it is called the length of the agreement.

Annual Percentage Rate (APR)

APR is often used for comparing car finance deals, and it is the amount of interest that will be paid annually on the amount being borrowed. APR is used for loans and credit cards as well as car finance, and it is generally advertised as a representative rate instead of an actual rate. It is a legal requirement that the APR is shown on all relevant documentation and advertisements for car finance offers.

Balloon Payment

This is the lump sum payment that is paid at the end of a finance agreement. It is usually used in Personal Contract Purchases (PCP), Lease Purchases and other similar car finance agreements. The balloon payment is the final payment that completes the finance agreement and gives you legal ownership of the car.

Some car finance agreements make the balloon payment optional if you want to keep the car, while others make it a requirement.

Conditional Sale

A conditional sale is a type of car finance where the sale of the car is dependent on you completing all the terms of the finance agreement. This could be making all the necessary repayments or other additional charges. A conditional sale is similar to a Hire Purchase agreement, except at the end of the agreement term you will automatically become the owner of the car.

Always read your car finance agreement thoroughly before you sign it and ask your provider about anything in it that you do not understand. It is crucial that you are aware of everything you are agreeing to before you make the contract official.

Deposit Contribution

Car dealers sometimes have offers and promotions where they make a contribution to the minimum deposit payment for the car finance. This is known as the deposit contribution and can reduce the overall cost of the finance agreement.

Early Settlement

Early settlement is what it is called when you pay off a finance agreement before the end of the agreement term. By paying the finance off early, you might be able to save on the amount of interest that is charged.

Final Payment

The final payment is the last repayment that is made towards a car finance agreement. Some final payments will include a purchase fee or a balloon payment, which is required to become the owner of the vehicle.

GAP Insurance

GAP insurance stands for Guaranteed Asset Protection, and it covers you if your car is involved in an accident when the value is less than the finance remaining. Car insurance companies will only pay out current market value, and if the remaining finance is more than this, then you will be required to pay the remainder.

GAP insurance will cover you for the difference between the value and remaining finance.

Hire Purchase

Hire Purchase (HP) agreements are one of the most popular types of car finance. They involve paying an initial deposit and then a fixed monthly repayment for an agreed term. You will not own the vehicle until after the final payment has been made.

When choosing a car finance deal, be sure to compare all the various options available to make sure you are getting the best deal. Compare the APR, repayment terms and what happens at the end of the finance agreement.

Lease Purchase

A lease purchase is a type of HP agreement; however, a total sum is deferred until the end of the agreement term. The size of this sum is decided by the forecasted mileage and age of the vehicle.

Part-Exchange

Part-exchanging is when you trade in an existing car and use its value towards buying a new car. When it comes to car finance, this value can go towards a finance deposit.

Personal Contract Purchase

Personal Contract Purchase or PCP is another common type of car finance. It has fixed monthly payments that cover part of the car’s value. At the end of the agreement, you have the choice to pay the remainder as a balloon payment and keep the car or pay nothing else and return it.

Residual Value

This is how much the car is worth at the end of the car finance agreement. Some finance providers will guarantee a residual value depending on the agreement term. It is determined by the mileage, age and resale appeal of the car.

Trade Value

The trade value refers to how much the vehicle is worth if it is sold at a car auction or purchased by a dealership. Most car dealers and some finance companies will only offer you trade value for an old car.

Car finance deals can be easily compared online through various free resources. These comparison websites will give you everything you need to know about the car finance deals on offer, including the APR, monthly repayments and agreement terms.

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