Car finance jargon
Don’t get a loan without understanding the car finance jargon. Do you know what a balloon payment is? How is the GMFV calculated?
Also known as the Documentation Fee, this is the charge for arranging the car finance, the cost of this fee is allowed for in the APR (Annual Percentage Rate).
The Agreement term is the period over which you agree to repay the loan. The APR, the cost of borrowing the finance, includes the interest rate, charges and administration fees. The APR is the best way to compare the Cost for car finance.
Most finance agreements, such as a Personal Contract Purchase or Personal Contract Hire, require you to estimate your Annual Mileage at the beginning of the contract. The Annual mileage is part of the information that goes to make up the GMFV (Guaranteed Minimum Future Value), the value of the car at the end of the contract. If you under-estimate your mileage, you will have to pay for the excess miles at the end of the agreement.
Bad credit history
When you apply for a loan or car finance, the Lender will want to check your credit history with a CRA Credit Reference Agency; this will tell them how you have performed in the past with your finances and indicate how likely you are to make the repayments.
If your credit history is good, and you do not have any Defaults or CCJ’s against your name you will probably get the loan, but a Bad Credit Score will affect the chance of you receiving credit. Your credit score is something you should actively protect. You can check your credit history with one of the three CRA’s.
You may have a cash deposit towards your new car, or maybe you are going to part exchange your existing car; the balance you fund is the actual amount you end up borrowing for your next car purchase.
Balloon payment or (GMFV)
A balloon payment also is known as the (Guaranteed Minimum Future Value) is the sum that is deferred until the end of some car finance agreements, for instance on Personal Contract Purchase and Personal Contract Hire contracts. Delaying the payment means you will make lower monthly repayments for the duration of the deal, at the end of the agreement you will have the option to pay a balloon payment to buy the car outright.
A Conditional Sale is a finance agreement which providing you have paid in full and met the terms of the contract; the car will automatically belong to you. Similar to an HP agreement except with the HP you pay an “Option to Purchase” before ownership of the car transfers to you.
The Credit Agreement is the legally-binding contract containing the details of the finance agreement between the finance company and you, the borrower. The credit agreement includes the terms including the amount borrowed, the period of the loan and the fixed APR, as well as your rights and responsibilities.
The scoring system used by the finance companies to determine your credit history when deciding on a car loan application.
As part of a promotional or marketing campaign, some car dealers will often be prepared to contribute to the minimum deposit payment required under a finance agreement.
Depreciation is the amount a car will devalue over a period.
Otherwise known as the Administration fee, this is the charge you will need to pay for the setting up of the finance contract and the issue of documentation. APR includes the Documentation Fee.
If you want to repay a loan or finance agreement before the end of the contract, you will need to request, from the Lender, an “Early Settlement” figure. By paying the finance company early, you may save on the interest that would have otherwise been due for the remainder of the agreement.
The difference between the amount of the loan remaining and the agreed market value of the car is the “Equity”. When the market value is higher than the outstanding finance, the customer has Equity in the car, but if the vehicle’s value is less than the outstanding amount owed you will have “Negative Equity”.
The final payment made under finance contracts; with a Hire Purchase agreement, it is known as the (option to purchase fee) while with a Personal Contract Purchase it is called the GMFV.
Fixed Rate means the APR (Annual Percentage Rate) that will remain fixed for the length of the contract.
Car dealers will often quote a Flat Rate of interest (on a monthly or annual basis); this is the base interest rate charged on the finance and does not include other charges like admin fees. To compare finance deals on a like for like basis you should always request the APR and not the flat rate.
GAP insurance (Guaranteed Asset Protection)
Your insurance company will only pay out the current market value if your car is in an accident.
So with a car finance credit agreement it can be wise to obtain GAP insurance, it can help to cover the difference between the market value (paid out by your insurer) and the amount you have outstanding on your car finance (Finance GAP), or the original purchase price of your car (Return to Invoice GAP).
Your income before deducting tax and National Insurance is the Gross Income you will be asked for your this when applying for finance.
Guaranteed Minimum Future Value
The GMFV occurs in agreements such as a Personal Contract Purchase where the cost of a percentage of the car is deferred until the end of the deal. The future value of the vehicle is assessed, by the Lender, at the beginning of the contract and this is known as the Guaranteed Minimum Future Value. (See also Balloon Payment). The GMFV includes many factors including the estimated annual mileage you will drive and the length of the agreement.
Hire purchase (HP) you usually pay a deposit followed by monthly repayments over an agreed term. You are the ‘registered keeper’ of the car, but not the owner, ownership remains with the finance company until the final payment and any option fee to purchase is made.
A legal requirement in the UK for drivers, any finance agreement will insist your car has comprehensive cover at all times.
The amount you are charged to borrow money on a finance agreement is known as the interest rate.
A Lease Purchase is a form of Hire Purchase agreement. An amount of the car’s value is deferred until the end of the contract; the sum calculated by the projected mileage and age of the vehicle.
Under some car finance such as a lease, the repayments are referred to Monthly Rentals, instead; this is because generally when you do not have an option to own the car, you will always be renting until the end of the contract.
Net Income is your income after the deduction of income tax and national insurance.
Option to purchase fee
Occurs on some car finance contracts such as an HP agreement, it is a voluntary final payment that when paid will transfer the ownership of the car from the Lender to the customer.
When you buy another car, and you trade in your existing vehicle towards the cost of the new cars value, this is a part exchange.
PCP Personal Contract Purchase
A Personal Contract Purchase (PCP) is similar to an HP except, instead of paying off the total value of the car, you only pay the amount the car will depreciate followed by an optional balloon payment (the GMFV) This final amount, the future value of the vehicle, is based on age and estimated mileage.
Monthly repayments for a PCP agreement are lower than for a comparable HP agreement because of the deferred future value. With this form of contract, the GMFV payment of the car is optional, to buy the car outright you have to pay this, but you could hand the keys back and walk away.
A quotation will give you the costs of a finance agreement, and asking for a quote does not commit you to go ahead nor will it leave a trail on your credit rating.
By law, the quotation must include any deposit required, monthly repayments, APR Annual Percentage Rate, any balloon payment, all other charges and the total amount payable.
The value of the car at the end of the finance agreement is the residual value; the finance company may or may not guarantee this value subject to the terms of your contract. The residual value is calculated by the anticipated future to resell value of the car based on such things as the estimated mileage and age of the vehicle at the end of your agreement.
Most car finance deals secure the loan against the car; this means less financial risk to the lender because, in the event of repayment problems with the borrower, the vehicle can be taken back by the Lender. The advantage to the borrower of the Lender having the car secured on loan is that this allows them to be more flexible with the terms and conditions they can offer you.
The length of the agreement you signed up for to finance your car.
The amount the car is worth when bought by a car dealer or sold at auction. Most non-prime finance companies will only lend up to a maximum of a car’s trade value.
Every car has a unique Vehicle Identification Number (VIN) that remains with the vehicle for its lifetime; the VIN is used to track the cars identity and prevent fraud.
Car manufacturers provide a warranty on new cars, usually for three years, to cover unexpected mechanical problems; warranties are also available for used vehicles.