Car finance jargon

Administration fee

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).

Agreement term

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.

Annual mileage

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.

Balance financed

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.

Conditional Sale

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.

Credit agreement

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.

Credit rating

The scoring system used by the finance companies to determine your credit history when deciding on a car loan application.

Deposit contribution

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

Depreciation is the amount a car will devalue over a period.

Documentation fee

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.

Early settlement

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.

Equity

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”.

Final payment

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

Fixed Rate means the APR (Annual Percentage Rate) that will remain fixed for the length of the contract.

Flat rate

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).