The car finance industry is full of jargon, which can make applying for car finance even more daunting. We shed some light on some commonly used terms.

My Car Credit try to explain everything we do in a way that makes sense to everyone, although we’re the first to admit that sometimes we fall into using car finance jargon.

To help, we have created a dictionary of some of the most common terms that you may come across throughout your finance application process.

APR

A loan’s Annual Percentage Rate is the amount your credit costs you each year. This is expressed as a percentage of the loan amount. The APR does take into consideration any additional fees or interest.

Broker

A broker is a person or company that acts as an intermediary, searching for products on your (as the customers) behalf.

Balloon Payment

The Balloon Payment is the cars guaranteed future value.

Credit Search

Every time you apply for credit, the finance broker or lender will carry out a credit search on you based on information held by the Credit Referencing Agency. The results will help to determine whether you should be accepted or declined for credit.

Credit Score

Your Credit Score is used by lenders to help determine whether your application for credit will be accepted. It is an indicator on how well you manage your finances.

Credit Agreement

A Credit Agreement is a legal contract between you as the customer and the company who you are obtaining credit from.

County Court Judgement

A County Court Judgment (CCJ) is a type of court that may be registered against you if you fail to repay money you owe. It sets out how much is owed, how the money should be repaid and the payment deadline.

Cost of Credit

The cost of credit is the additional amount, over and above the total amount borrowed, that you as the borrower has to pay. The cost of credit includes interest, arrangement fees and any other charges.

Consumer Credit Act

The Consumer Credit Act 1974 is a piece of legislation which regulates Consumer Credit, it provides a wide range of rights against companies who provide credit.

Document Fees

Commonly known as a doc fee, this fee covers the cost of filling out all of the paperwork involved within the process of a customer applying for and obtaining credit.

Depreciation

Depreciation is the amount of value a car loses over time.

Default Interest

Default Interest is the higher interest that a borrower must pay after a default. If a borrower defaults on a loan, he/she must pay default interest in order to compensate the lender for the added risk of extending credit to him/her.

Deposit

This is the initial payment (cash) that you put down at the start of the finance agreement. This will be deducted from the amount of credit you borrow to pay for the car.

Equity

Once you have paid all of the monthly payments for your car, you become the owner and your car becomes your equity.

Fixed Rate

A loan with a fixed rate means that the amount of interest on the loan is set at the beginning of the agreement and is to stay at the same rate until the agreement ends.

Guaranteed Future Value

The Guaranteed Future Value of your car is set at the start of the finance plan. It is based on various factors such as the length of your car loan, your expected annual mileage and your cars projected retail value at the end of the finance plan.

Guarantor

A guarantor is a third party, usually a parent or close relative, who agrees to pay your finance agreement if you find yourself in a position where you can no longer keep up with the repayments yourself. A guarantor is usually required for younger borrowers with minimal credit history.

HPI Check

This is a check carried out on a used car. The check looks at the cars history to see if it has ever been written off or stolen, it will also check to see if there is any outstanding finance on it.

Hire Purchase Agreement

If you choose to pay for your car with a Hire Purchase agreement, you will normally pay an initial deposit and will pay off the entire value of the car in monthly instalments. When all the payments are made, the Hire Purchase agreement ends and you own the car.

Interest Rate

Interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from lenders. This is worked out as a percentage.

Lender

A lender gives money to a borrower with the expectation of repayment in an agreed time, usually with added interest.

Negative Equity

Negative Equity is the term used to describe your financial situation when the current value of your car is less than the amount you have outstanding on your finance agreement.

Option to Purchase Fee

When all the repayments have been made in certain finance agreements, the customer will be given the option to buy the car so that they become the owner. This means paying an ‘Option to Purchase’ fee which covers the administrative cost to the finance company of transferring ownership of the car to the customer.

Representative APR

If a product has a ‘representative APR rate’, it means the annual rate at which lenders may charge you as the customer for borrowing. The APR has to be displayed as a representative by lenders, as it allows you to compare other products easily and fairly.

If you see an advertisement with a ‘Representative APR’ this means that the majority of customers (i.e. at least 51%) who respond to the advert will receive this APR rate, some, however may be different, depending on their credit rating and individual circumstances.

Residual Value

This is the value of your car at the end of your finance agreement.

Soft Search

This is a credit search that does not leave a visible trace on your credit profile.

Instead of searching the full file, lenders take what is known as a “snapshot” of a customer’s credit report. This allows them to examine all the important details they need to see a customer’s creditworthiness

Secured Loan

A secured loan is money borrowed that is secured against an asset owned by the customer.

Car finance is secured on the value of the car, and if you do not keep up repayments then the lender might be able to take the car from you.

SECCI

Standard European Consumer Credit Information

This information is available to let you compare one finance product against another.

The key features within the information are; what type of credit you have and how much, the duration of the credit agreement, cost of repayments and other costs associated with borrowing and different rates of interest.

Total Repayable

This is the total amount you will repay to the lender. It includes the original loan amount and the total cost of credit, including the interest and any fees charged.

Underwriting

Loan underwriting is the process that is undertaken to look at all of the information provided by each loan applicant and their credit file; to assess whether or not they meet a minimum loan criteria.  Each application is assessed on the likelihood of the applicant making the required payments based on both the current affordability of the loan and their financial past. Accepted applicants will demonstrate that loan repayments are affordable, based on their income and outgoings for the term of the loan and that they have a strong record of managing credit in the past.