Car Finance Jargon Buster

Car Finance Jargon Buster

If you keep hearing car finance terms you don’t understand, you’re definitely not alone. To try and clear up some confusion, this guide looks at and defines some of the most common car finance jargon.

Administration fee

Sometimes called a documentation fee, this is a charge for setting up finance and issuing the relevant documents needed. The cost will usually be included in the total amount you have to pay, and taken into account when the Annual Percentage Rate (APR) is worked out.

Agreement term

The agreed length of time which you have to repay the finance over.

APR

This stands for Annual Percentage Rate. The APR figure helps borrowers compare credit costs across lenders. The APR calculation takes into account interest and other charges (such as set-up fees).

Balloon payment

This is a large final payment that’s paid at the end of some financing agreements – so it comes after a set time period, usually of several years, of repayments. This figure should always be worked out and agreed at the start of the agreement, and once paid allows you to have full ownership of the vehicle.

Credit Score

Your credit score is a number given to you by a credit reference agency, and is based on your history of paying back previous and existing debt. This is used by lenders so that they can determine whether you are likely to repay any debt they’re considering lending you.

Deposit

An initial payment paid by the customer, towards the overall cost of the vehicle. This can be paid financially, or sometimes in the form of the customer’s previous vehicle they wish to trade in.

Depreciation

This refers to the value your car loses over time due to age, mileage and other factors, such as wear and tear.

Early settlement

If you pay off a finance agreement before the agreed term is completed, you might be able to save on the interest that would have been charged to you otherwise – paying early is known as an early settlement.

Hire Purchase

This is often shortened to HP. This finance deal normally involves putting down a deposit and then is paid with fixed monthly repayments. Once the debt has been repaid in full you officially own the car.

Joint loan

It’s often possible to apply and sign a finance agreement with two or more people. In this situation, everyone named on the loan is responsible for making sure it’s paid back.

Lease Purchase

Sometimes called LP, this form of finance works almost exactly the same as a personal contract purchase. The main difference is that, at the end of the term, the final balloon payment must be paid.

Part exchange

This is when a customer exchanges their car, usually with a car dealership, to form part or all of a deposit towards the price of their next new vehicle.

Personal Contract Purchase

Often called PCP, this finance is repaid with monthly payments, often starting with an initial deposit. You don’t own the car unless you decide to pay the optional balloon payment at the end.

Secured loan

This is where an asset is used as equity against the loan. Car finance tends to be secured on the value of the car and, therefore, if your repayments are not kept up then the lender is able to repossess the car.

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