Motor Finance Terminology

Motor finance does not need to be confusing. Today, arranging motor finance is so easy that you can do it on your mobile phone. However, there may be some terminology in the contract that you might not be familiar with.

Below we have compiled a list of common finance terminology and their meanings. Click on an option link below for more information about what it means.

The APR shows the annual cost of a finance agreement over and above the amount you have borrowed. The APR will include interest rate charges and any other fees included in the agreement, such as administration fees or option to purchase fees. By law, the APR must be shown on relevant documentation presented to customers in showrooms or sent to them to them to enable them to make an informed decision. You can use the APR to compare the cost of different finance products.

This is the agreed interest rate charged on the finance agreement and is charged annually. Dealers will sometimes quote a monthly or annual flat rate, but you should always ask for the Annual Percentage Rate (APR), which more accurately describes the true cost of the finance. The flat interest rate does not include other charges like any administration fees or any option to purchase fees.

This means the same interest rate is charged for the duration of the agreement. This means the customer’s monthly repayments will not alter. This is an ideal product for the budget conscious consumer.

This means that the interest rate can go up or down depending on the Bank of England’s base interest rate or any LIBOR (London Interbank Offered Rate) rate changes during the term of your finance agreement. This type of finance agreement is more common in the mortgage or secured loan markets. Very seldomly used the motor finance marketplace.

A credit agreement is a legally binding contract between the customer and the finance company that is either signed in the showroom on printed documents or signed electronically at home or work. It must include details of the loan amount, the term, rates of interest, other charges and your rights and responsibilities for the duration of the agreement. You will receive a copy of the agreement you have entered including the terms and conditions.

A Hire purchase (HP) agreement is a popular motor finance product. When taking out an HP agreement, you pay an initial deposit, then a fixed monthly repayment over a set number of months. Although you become the ‘registered keeper’ of the car, you are only hiring it and you do not own it until you have made the final repayment (including any administration or option to purchase fee).

Personal Contract Purchase (PCP) is a form of hire purchase agreement, which includes a voluntary “balloon” payment at the end. This final amount represents the future residual value of the car, based on the age of the vehicle at the end of the agreement and the forecast mileage. If you exceed the agreed forecasted mileage there will be an excess mileage charge per mile to pay to the finance company that is in the PCP agreement. Monthly repayments are lower under a PCP agreement than a comparable HP agreement because of this deferred amount. With this type of agreement, payment of the future value of the car is optional. it must be paid if you wish to own the car outright, you can part-exchange the car and the difference between the part-exchange value and GFV can be used as a deposit to buy another car or van, or you could simply decide to hand the keys back and start another agreement for a different vehicle.

A balloon payment is the lump sum that is deducted from the vehicle price (also known as a Guaranteed Minimum Future Value or a Guaranteed Future Value) deferred to the end of a finance agreement in Personal Contract Purchases, Lease Purchases, or similar agreements. It completes the finance agreement and allows you to take ownership of the car once any option to purchase fee has been paid to the lender. You may be obliged to pay a balloon payment under some agreements, while it is optional under others – so be sure to check which type of agreement best serves your needs.

This is where a part of the total cost of the car is deferred until the end of the contract. The forecast value of the car is assessed by the finance company at the beginning of the agreement. This is known as the Guaranteed Minimum Future Value or Guaranteed Future Value. In agreements such as Personal Contract Purchase, it is important to be realistic with your estimates of how many miles you expect to cover each year as this will help determine the GMFV (as well as the length of the agreement). There are also mileage penalties to pay if you exceed the agreed mileage at the end of the agreement.

An additional fee at the end of some finance agreements (such as hire purchase or PCP agreements) which, once paid, transfers ownership of the car from the finance company to the customer.

This is the length of time over which you agree to repay the amount of finance you have borrowed.

A part of the scoring system used by finance companies when they obtain information stored on credit information bureaus such as Experian, Equifax, or Trans Union to enable them to decide the rate of interest to charge you based on the perceived risk they see in you.

Smart Repair stands for Small, Medium Area Repair Technology which means the process of repairing a small area of your vehicle to make it look new again, without replacing a whole panel. The Smart Repair is to make your life easier and to cut cost.

Service Plans are a way to pay for your routine servicing and maintain a service history for your vehicle for an agreed number of years and/or an agreed mileage at inception.

Stands for Guaranteed Asset Protection which is an insurance you can purchase to protect yourself from any shortfall from the market value of your car if your car was written off after an accident and the outstanding finance amount. There are other Gap products out there including RTI Gap which stands for Return to Invoice and the benefit of this product is that it covers for the original invoice price. There are several gap products out there from different suppliers so make sure you do your research.

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