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Car finance glossary

Feeling a bit bamboozled by finance jargon? Here’s our helpful guide to the terms and phrases you might come across when you’re deciding on the best way to fund your car purchase.

Also known as Finance Agreement. This is the document that lays down, in detail, the structure of the finance package that you’ve entered with the finance company.

Stands for Annual Percentage Rate. This figure indicates the annual rate of interest attached to your loan (including any fees) so you can determine the overall annual cost of your finance package. It’s always best to check the APR & also the total amount payable, as that shows how much you’re actually going to pay over the period of the loan.

Several finance options now include a balloon payment. This option lets you defer some of the loan amount to the end of the agreement, potentially reducing you monthly payment However make sure you’re happy with the balloon amount, as it will have to be paid off at the end of the agreement. See also Guaranteed Minimum Future Value.

This is when you receive a cash payment back from the dealer as part of your new deal. This could happen, for example, if you have more equity in your current car than you need for your new one or you’re part exchanging two cars for one.

The Consumer Credit Directive is a set of EU regulations that have been introduced to ensure that all consumers receive good quality advice & easy to understand information with regards to consumer finance. It has been implemented to ensure consumer's receive a high level of protection with regard to finance adverisments & processes.

Before agreeing to provide the finances you need, your lender will want to know that you’re a reliable debtor. They’ll find this out by looking into your credit history (or record), which contains information on past borrowing and your assets. The better your credit rating (or score), the more likely it is that they’ll be willing to lend to you, it can also affect the rate of interest you’re able to receive from the finance company.

This refers to the value your car loses over time due to age, mileage and wear & tear.

If you owe finance on your current car, and that is less than its current value, then that is called equity. You can use this equity as a deposit for your next car, or alternatively take cash back & remove that equity from the deal.

Alternatively if you owe more than your car is worth it’s called negative equity. This amount can often be carried across to your new car & the new finance agreement, or you could pay a cash deposit to settle that difference.

A fixed rate means that your monthly payments are unaffected by interest rate changes and will remain the same.

This is the monthly interest rate you’ll pay, and doesn’t include admin fees. Beware of confusing this with the APR as this doesn’t take account of any fees.

If you have an accident or your car is stolen, standard car insurance will only pay out the equivalent value of the car at the time the incident occurred – but you’ll still be liable to pay off any finance agreement you took out on your car in full. As the name suggests, vap insurance covers the difference between the insurance pay out and the amount left to pay.

When you take out a PCP or other residual value based agreement (see below), your lender will calculate an GMFV figure, which is the minimum amount they think your car will be worth when the agreement comes to an end. They’ll use this information to calculate the cost of your monthly payments, and also the balloon payment. This figure takes into account the mileage that you think you’ll complete whilst you’re paying the loan off. It’s a contract so you’ll need to ensure you take care of the car & maintain it, as well as pay for any excess mileage that you amass.

However the benefit is that, at the end of the agreement, you’ll have the option to hand the car back to the finance company if you find it is worth less than your GMFV.

A form of car finance where you agree to make monthly payments for a fixed term. Once your final payment’s been made, you own the car. Personal loan works in a similar way, but you own the car from the beginning.

Part exchange (or part ex) is when you use your existing car as part payment for your new one – your old car’s taken off your hands, and your new car will cost you less. You can get an instant part exchange quote from The Car People by using the 'What's my car worth?' section below.

The Consumer Credit Directive was brought in to ensure that you have all the information you need to make an educated decision whether a finance package is right for you. As part of this legislation a document was designed called a PCCI. This shows you all the details of your finance agreement & is available to you at any point. The stucture of the PCCI has been designed so that it is always the same. This allows you to go & review your finance options & enables yu to compare packages easily.

Stands for Personal Contract Purchase. This is a popular form of car finance, alongside hire purchase. You put down a deposit and then pay monthly instalments; when the agreement comes to an end, you can either pay the balloon payment to keep the car, or simply hand it back & move on. You can read more about PCP here.

Another form of finance where you agree to pay a monthly payment, similar to hire purchase. However with personal loan you own the vehicle from the beginning, as it is not secured against the vehicle. This type of finance is often used when you want to borrow all or even more than all of the value of your new vehicle.

This is the future value of your vehicle at a certain point in time. Often used for calculating Guaranteed Minimum Future Values.

SAF is a scheme introduced by the Finance & Leasing Association to enable retailers to test their teams to ensure they're trained to an approved level. All relevant team members have to be re-tested each year. This is to ensure they understand the products they are offering & give good advice to consumers. All The Car People sales advisors & hand over executives are fully SAF approved.