It's easy to be become puzzled by the various terms and phrases used when buying a car. Here are a list of terms associated with car finance with corresponding explanations.
Annual Percentage Rate is the yearly charge for borrowing. It takes into account the interest payable, any documentation, and option to purchase fees.
Also known as credit rating, credit profile or credit history. Everybody over 18 years old has a credit score. Held with different agencies, this is just one piece of information finance companies use to decide on lending. It contains details of other loans and credit agreements you have and has the payment history for them.
A set of directives and legislation's laid down by the EU to bring standardisation to the finance documentation and ensure the customers have an adequate explanation of the agreement they are entering into.
When buying a car on finance, any upfront payment is known as your deposit. This can be an amount of money paid, a part exchange, or a combination of the two.
Also known as "doc fees". Finance companies charge these to cover the administrative costs (such as registering on the HPI database).
Also known as the "electoral roll", this is the database of people registered to vote with the UK. It is important you keep this information up to date as finance companies look at this information for address and ID purposes.
The FCA are the regulatory body who independently regulate UK financial services, such as the sale of insurance products, and ensures all customers are treated fairly.
The actual interest rate applied to the finance. This represents the interest you will be charged.
GAP stands for Guaranteed Asset Protection. It is an insurance product that pays out in the event of a total loss situation on your car. It pays the difference between your insurance settlement and the outstanding finance amount on your car.
The end payment of a PCP is known at the GMFV. This is calculated at the beginning of the agreement by the finance company taking into account: the cars residual value, the mileage on the car, and the mileage you are going to be doing during the agreement.
A common form of car finance (sometimes also known as a Conditional Sale Agreement) where the loan is actually secured against the car. It's not only is easier to be accepted on HP but you also have extra rights and flexibility too.
A database of all cars in UK. Originally called Hire Purchase Information it shows: outstanding finance, if the car has ever been written off by an insurance company, and if it is wanted by the police.
If you owe more on your finance agreement than what your car is worth, the difference between the two is the negative equity.
A fee added to the final payment of any HP agreement. It is normally a nominal amount to transfer legal ownership of the car from the finance company to the keeper.
PCP is a form of Hire Purchase (HP) with a much higher final payment known as a Guaranteed Minimum Future Value (GMFV). Usually you can enjoy a shorter term, a lower monthly payment, and put down a smaller deposit than on regular HP. At the end of the agreement you have three options. Firstly you can simply hand the car back to the finance company (subject to mileage and condition terms) and walk away with nothing more to pay. Secondly if you want to keep the car, you simply pay the final payment and the car is yours to do with as you please. The third option is that you part exchange the car - any equity you have can be put towards the deposit of your next car.
Also known as a fixed sum loan agreement. The loan is not attached to the car and is secured purely on the person named on the agreement. This type of finance is usually for people who are in negative equity.
RTI stands for Return To Invoice. It is an insurance product that pays out in the event of a total loss situation on your car. It pays the difference between your insurance settlement and the original invoice price of the car.
The total you will have paid at the end of the car finance agreement. It is made up of: all the monthly payments you have made, any deposit and/or part exchange you put in at the start of the agreement, and any other fees on the agreement.
Hire Purchase (HP) and Conditional Sale Agreements have a legal right built into them that, subject to the car being in reasonable condition for its age and mileage, the car can be handed back to finance company once half of the Total Amount Payable has been paid. Even if you are in negative equity.