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A-Z of car finance terms

Car finance cost

Nearly nine out of 10 (85%) of car owners say that the idea of being in debt is stressful, according to YouGov data, yet in the last year some 2.4 million cars were bought using finance options.

The main reason for this is that financing a car is often the most affordable way for people to purchase a vehicle.

Yet, with a third (31%) of road users also saying that financial matters confuse them, it’s possible that some car-buyers are committing to a finance contract without being fully aware of what they are agreeing to.

To help potential buyers who might be confused or intimidated by contract terminology, Car Shop has pulled together a jargon buster so that we all know exactly what we’re signing up to and are able to make an informed decision.

“Buying a car can seem like a minefield to many people, as there are so many things to consider and to avoid and the financial risks can feel quite high,” said Kirk O’Callaghan of Car Shop.

“For those of us not used to dealing with contracts on a regular basis – which is most of us – they can often seem like they’ve been written in another language.

“We think it’s really important to ensure that people know what they’re signing up to before committing to buying a car on finance. We hope this information helps those looking to purchase a new or used car, and remember, if in doubt, make sure to ask!”

APR
APR 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 as well as the total amount payable, as that shows how much you will actually pay over the period of the loan.

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

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

Flat Rate
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.

GAP Insurance
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, gap insurance covers the difference between the insurance payout and the amount left to pay.

Hire Purchase (HP)

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

PCP
PCP stands for Personal Contract Purchase. This is a popular form of car finance and often sits 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, part exchange or upgrade the car, or simply hand it back and move on.

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

SAF Specialist Automotive Finance
SAF is a scheme introduced by the Finance and 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 and give good advice to consumers.

About Gareth Herincx

Gareth is a versatile journalist, copywriter and digital editor who's worked across the media in newspapers, magazines, TV, teletext, radio and online. After long stints at the BBC, GMTV and ITV, he now specialises in motoring.

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