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Dec
Car finance can be confusing. With an abundance of acronyms, abbreviations, and odd terms, finding the right car finance deals for you can be tricky.
As an expert in car finance, GetCarFinanceHere has put together this simple and straightforward car finance glossary, helping you to understand the key terms involved with financing a car.
Car Finance Glossary
Agreement term
The agreement term refers to the length of time that you’ve agreed to pay back your car finance. This is usually around three years but can be shorter or longer depending on your specific agreement.
APR (Annual Percentage Rate)
APR stands for Annual Percentage Rate, which is a other term for interest rate. It will be expressed as a percentage. It’s the amount of money you’ll need to pay back on top of your loan amount.
Arrears
Arrears is the term used for money that is overdue being paid back. For example, if you miss a scheduled loan repayment, you’ll be in arrears.
Balloon payment
The term ‘balloon payment’ may be used when discussing PCP car finance or some car leasing options. It will be the final lump sum you’ll have to pay if you want to own your car after the lease period. It will usually be calculated at the beginning of your agreement period.
Broker
A car finance broker, like GetCarFinanceHere, will contact numerous car finance lenders in order to find the best car finance deals for your specific circumstances. Using a broker can often save you tome and money, as they can contact lenders on your behalf to get the right deal. Car finance brokers won’t charge you for the service but instead get commission from the car finance lenders.
Car finance
Car finance is a loan that will be specifically used to buy a car, with the money being paid back over an agreed period of time. There are various types of car finance available, with some allowing the individual to own the car after the agreed period.
Car lease
A car lease essentially means you will be hiring a car for a set period, making monthly payments towards this service. At the end of the agreed period, you will give the car back.
You can find out more about how car leasing differs from car finance in our guide Should I Lease or Finance a Car?, and you can read about how car leasing differs from buying outright in our guide Should I Buy or Lease a Car?.
Credit score
A credit score is used in car financing to determine your ability to pay back the money you have borrowed. It uses a variety of different factors, such as your past and current debt and financial situation, credit cards, loans, personal associations, and amount of credit checks you’ve had.
Typically, the higher your credit score, the more likely you’ll be approved for car finance, and the better rates you’ll be able to access. However, GetCarFinanceHere can help you to find bad credit car finance, where you’ll be assessed on your current situation and ability to make repayments, with less focus on your poor credit score.
You can read our guide to find out more about why a credit score is important when buying a car.
Deposit
A deposit will be a lump sum that you’ll pay at the beginning of your car finance agreement. Typically, the more you pay as a deposit, the lower your monthly repayments will be. The majority of car finance types require a deposit to be paid, although GetCarFinanceHere can help you find no deposit car finance options.
Depreciation
Depreciation refers to when an asset decreases in value over time. So, in car finance terms, it depreciation will be how much your vehicle has decreased in value over the loan period. Most cars will depreciate over time, due to reasons such as damage, mileage, age, and less demand for that model.
Early settlement
Early settlement, or early repayment, is when you choose to finish your finance agreement before the agreed end date. You can do this by paying off the remainder of what you owe, and often there will also be an early settlement fee.
Equity
Equity means the difference between the current value of the asset, or vehicle, and the amount left to be paid on the loan. You can have negative equity when you owe more money to the lender than the car is worth. Positive equity is when the car is worth more than what you owe.
Finance agreement
Your finance agreement is the terms you have agreed to with your car finance lender. It will include the vehicle, the amount you will be loaned, the amount you’ll need to pay back, interest rates and fees, and the period of time you’ll have to make your repayments. It will also detail what will happen after the finance agreement period has ended, i.e., whether you will need to return the car or if ownership will transfer to you.
Fixed-rate interest
Fixed-rate interest is when the interest rates will not change throughout your finance agreement period – they will be fixed in place. This means you’ll pay the same amount of interest every month, so can be helpful for budgeting purposes. However, often fixed rates are higher than variable rates, which are rates that can change.
Guarantor
A guarantor will be a third party that signs an agreement stating they will pay your debts for you if you are unable to pay them. Usually, they will be a close friend or relative. Guarantors are often used when the car finance lender believes the applicant has more risk of not making their repayments, perhaps because they’re young or have a poor or no credit score.
Hard credit check
A hard credit check is when a detailed search of your credit history is carried out, either by a company or car finance lender. A hard credit check will leave a mark on your credit report. If you have too many hard credit checks in a short space of time, it can negatively affect your credit score.
HP (Hire Purchase)
Hire purchase is a type of car finance. It typically consists of the applicant paying a deposit, and then making monthly repayments on their loan. After the finance agreement period, the applicant will own the ca, without having to make any extra payments. It’s one of the most common types of car finance.
Joint application
A joint application is when two people apply for car finance on one agreement. They will both be responsible for making the repayments, and both will be liable if any payments are missed.
Part exchange
Part exchange is when an individual trades in their old car as a contribution to buying their new car. The value of the old car will be taken off what is owed to purchase the new car. This can be done either when buying a vehicle outright or when buying with car finance.
PCH (Personal Contract Hire)
PCH car finance is a type of car lease agreement. It’s a long-term rental, where an initial deposit and monthly payments will be made. After the hire period, the individual will return the car to the lender, with no option to purchase it. Often, repayments for PCH are lower than for other types of car finance, so can be a good option if you have no interest in owning the vehicle.
PCP (Personal Contract Purchase)
PCP car finance is a type of finance option. Like PCH, it will involve paying an initial deposit and then making monthly payments. However, at the end of the payment period, the individual can either return the car to the lender or make a final balloon payment so they own the car.
Representative APR
Representative APR will be used as an example of the interest rates you will pay. They’ll often be different to the actual APR that you’ll pay for your specific car finance agreement. Typically, around 50% of customers will pay the same or lower than the representative APR that’s used.
Representative example
Representative example will be used to show you the kind of finance agreement you could access and how much it will cost you.
For example, a representative example could be borrowing £5,000 over five years with a representative APR of 13.5% and a deposit of £500 – the repayments for this would be £102.85 per month with a total cost of credit of £1,671.01 and a total amount payable of £6,171.01.
Soft credit check
A soft credit check is when a credit search is carried out that does not affect your credit score. The company or lender will be able to get a view of your credit history so they can get an idea of whether you’ll be able to make the repayments and be suitable for car finance. Usually, a soft credit check will then be followed by a hard credit check later on in the application process.
Variable interest rate
A variable interest rate means the interest rate could change. This would mean that your monthly repayments would also change. Variable interest rates can go up or down, so some months could cost you less, while others could cost more.
Looking for car finance?
GetCarFinanceHere can make your car finance simple. We’ll find you the best car finance deals from our network of lenders, finding the right options for your specific circumstances. Our friendly and knowledgeable team can help you navigate the car finance jargon, to make financing a car easy and straightforward.
You can apply online today or contact us for more information.