Explaining auto finance jargon

Many of us buy a car with cash because it's a good way to spread the cost over several years. This can make the car more affordable and you know exactly how much to spend on it each month. However, understanding auto financing can be a challenge due to the amount of particular language and terminology to get right.

To help you sort it all out, we've put together this AZ guide to auto finance jargon.

CONTRACT

The agreement is a legally binding contract between the borrower (you) and the lender (the financial company). It sets out the schedule of payments, interest, commissions and fees, and sets out your rights and obligations. Read it carefully and make sure that the value of the car is the same as you indicated. Ask questions or get a second opinion if you are unsure about anything in the agreement.

Credit amount

Not to be confused with the total amount due, the loan amount is the amount of money a financial company lends to you. This figure does not include the deposit or amount you will receive in exchange for your current vehicle.

Annual mileage

When you apply for Personal Contract Purchase (PCP) funding, you need to estimate your annual mileage. (Cm. CFP See below.) This is the maximum number of miles you can drive each year without any additional fees. It is important to do this correctly because you will be charged per mile in excess of the agreed maximum mileage. Costs vary, but lenders typically charge 10p to 20p for each mile in excess.

Annual Percentage Rate (APR)

The annual interest rate is the annual cost of borrowing. It includes the interest you will pay on the finance, as well as any fees associated with borrowing. The APR figure must be included in all quotes and promotional materials, so it is a good way to compare different financial transactions.

There are two types of APR: actual and representative. They are calculated in the same way, but a representative annual income means that 51% of applicants will receive the stated rate. The remaining 49 percent of applicants will be offered a different, usually higher, rate. The actual annual interest rate that you will receive when you borrow. (Cm. interest rate section below.)

Payment by balls

When you enter into a financial agreement, the lender will predict what the value of the car will be at the end of the contract. This value is given as a "callout" or "optional final" payment. If you choose to pay, the car is yours. If not, you can return the car to the dealer and return the deposit. Or you can trade it in for another car the dealer has using your original deposit. Any wear and tear or excess mileage costs will be added to the ball's final payment.

Credit rating / credit rating

A credit score (also known as a credit score) is an assessment of your suitability for a loan. When you apply for car financing, the lender will check your credit score to help make a decision on your application. A soft check is a preliminary check to see if you qualify for a loan from certain lenders, while a hard check is completed after you have applied for a loan and the lender reviews your credit report.

A higher credit score means that lenders see you as less risky, so it's a good idea to check your score before applying for a loan. Paying your bills and paying off debt on time will help improve your credit score.

Make a deposit

A deposit, also known as a client deposit, is a payment you make at the beginning of a financial agreement. A larger deposit will usually result in lower monthly payments, but consider all of your options before signing up. Note: It is unlikely that your deposit will be returned if you terminate the financing agreement, so paying a large amount upfront is not always the best option.

Deposit

Car dealers and manufacturers sometimes offer a deposit that goes towards the cost of the car. In some cases, you must also add your own deposit. Deposit contributions are usually offered with a specific financial deal and will not be available unless you accept that deal. 

Deposit fees can be quite large, which significantly reduces monthly payments. But be sure to read the details of the deal. The numbers in the headlines may look great, but the terms of the deal may not suit you.

depreciation

This is the value your car loses over time. A car's depreciation is especially steep in the first year, but the rate slows down after the third year. That's why buying an almost new car can make sound financial sense - the original owner will swallow up most of the depreciation. 

With a PCP deal, you are essentially paying for depreciation over the life of the contract, so buying a car with a low depreciation rate will cost you less per month.

Early settlement

Prepayment, also known as buyout or prepayment, is the amount payable if you decide to pay off the loan early. The lender will provide an estimated figure, which will likely include an early repayment fee. However, you will save money as the interest can be lower.

Capital

This is the difference between the market value of the car and the amount you owe the financial company. For example, if a car costs £15,000 but you still owe the finance company £20,000, your negative equity is £5,000. If the car is worth £15,000 and you only paid £10,000, you have positive equity. Although it's unlikely to happen.

Negative equity can be a problem if you want to pay off your loan early because you could end up paying more than the car is actually worth.

Over mileage fee

This is the amount you will have to pay for each mile you drive in excess of your agreed annual mileage. Excess mileage is commonly associated with PCP and rental deals. For these deals, your monthly payments are based on the value of the car at the end of the contract. Additional miles reduce the cost of the car, so you will have to pay the difference. (Cm. annual mileage section above.)

Financial Conduct Authority (FCA)

The FCA regulates the financial services industry in the UK. The role of the regulator is to protect consumers in financial transactions. All car finance agreements fall under the jurisdiction of this independent regulator.

Guaranteed Asset Protection Insurance (GAP)

GAP insurance covers the difference between the market value of the car and the amount of money left to pay out in the event of a write-off or theft of the car. There is no obligation to take out GAP insurance, but it's worth considering when you finance your car.

Guaranteed Minimum Future Value (GMFV)

GMFV is the value of the car at the end of the financial agreement. The lender will evaluate the GMFV based on the duration of the contract, total mileage and market trends. The optional final payment or balloon payment must comply with the GMFV. (Cm. Balloon section above.) 

GMFV is based on the assumption that you stay within your mileage limit, service your vehicle to recommended standards, and keep your vehicle in good condition.

Installment Purchase (HP)

HP is perhaps the most traditional form of car financing. Your monthly payments cover the total cost of the car, so once you've made your last installment, you'll be the owner of the car. The interest rate is set for the entire term, the loan amount is divided into equal monthly payments, usually up to 60 months (five years). 

Paying a higher deposit will lower the cost of your monthly payments. But you don't really own the car until you make the final payment. HP is ideal if you intend to leave the car at the end of the contract.

Learn more about installment financing (HP) here

Interest rate

Interest is the fee you pay for borrowing money to buy a car on credit. The interest rate is divided into monthly loan payments. Your financial agreement will state the total cost of the interest you will pay at the time of the loan. The rate is fixed, so the shorter the financial contract, the less you will spend on interest.

Part exchange

Partial exchange is the use of the value of your current car as a contribution to the value of a new one.

This can reduce your monthly payments as the cost of your car is deducted from the cost of the car you want to buy. The cost of your partial exchange depends on a number of factors that will be considered by the dealer, including the age of the vehicle, condition, service history, and current market value.

Personal Contract of Employment (PCH)

A PCH, also known as a lease agreement, is a long-term rental or lease agreement. At the end of the term, you simply return the car to the leasing company. Assuming you kept the car and hit your mileage limit, there's nothing more to pay for. Monthly payments are usually lower, but make sure the price you quote includes VAT. You are unlikely to be given the opportunity to buy a car when the lease period ends.

Purchasing a Personal Contract (PCP)

PCP deals can be attractive because the monthly payments are lower than for most other forms of leasing and financing. This is due to the fact that most of the value of the car is indicated at the end of the contract in the form of a lump sum. Pay and the car is yours.

Alternatively, you can return the vehicle to the lender to recover your deposit. Or get another deal from the same lender using your current car as part of the deposit.

Learn more about Personal Contract Purchase Financing (PCP) here.

Residual value

This is the market value at any point in the life of the car. The lender will project the residual value of the car at the end of the financial agreement to calculate your monthly payments. A car with a low depreciation rate will have a high residual value, so it will be more affordable to finance than a car with a high depreciation rate.

Market trends, the popularity of a car, and its brand image are just three factors that affect residual value.

Settlement

This is the amount required to fully repay the loan. Your lender can confirm the settlement amount at any time during the contract. If you have paid half of the amount due and make your monthly payments on time, you also have the right to simply return the vehicle. This is known as voluntary termination.

Period

This is the term of your financial agreement, which can vary from 24 to 60 months (two to five years).

Total amount payable

Also known as the total repayment, this is the total cost of the car, including the loan itself, the total interest payable, and any fees. This is likely to be significantly higher than the price you would pay if you bought the car outright with cash.

Voluntary termination

You have the right to terminate the financing agreement and return the car if you have paid 50 percent of the total amount due and have taken reasonable care of the car. In the case of a PCP deal, the amount includes the final payment in the form of a ball, so the intermediate point is much later in the agreement. In HP contracts, the 50 percent point is about half the term of the agreement.

Export

The financial company will lend you the money on the condition that you maintain the car and prevent damage to it. However, a certain amount of wear and tear is expected, so you're not likely to be fined for rock chips on the hood, a few scratches on the bodywork, and some dirt on the alloy wheels. 

Anything beyond that, such as roughened alloy wheels, body dents, and missed service intervals, will most likely be considered supernatural wear and tear. In addition to the final payment, you will be charged a fee. This applies to PCP and PCH deals, but not to a machine purchased from HP.

When entering into a car financing agreement, the finance company must provide you with fair wear and tear recommendations - always check the information provided carefully so you know what is acceptable.

Car financing is fast, easy and completely online at Cazoo. There are many quality Used cars to choose from at Cazoo and now you can get a new or used car with Kazu's subscription. Just use the search feature to find what you like and then buy, fund or subscribe to it online. You can order delivery to your door or pick up in the nearest Cazoo Customer Service Center.

We are constantly updating and expanding our range. If you're looking to buy a used car and can't find the right one today, it's easy set up promotional alerts to be the first to know when we have vehicles that suit your needs.