APR stands for Annual Percentage Rate. The APR is the full cost of credit per year in your car loan. It takes into consideration all fees and costs, making it the best rate for comparing car finance deals with each other. It is expressed as a percentage of the loan amount.
A broker is a person or company who arranges a transaction between a buyer and a seller. In return for arranging the transaction, they receive a fee or commission. In car finance, a broker will source and arrange the right deal for the customer from their panel of car loan lenders.
A balloon payment is a lump sum owed to the lender at the end of a car finance agreement. It is most commonly associated with Personal Contract Purchase (PCP) agreements. It is sometimes referred to as an ‘optional final payment’. The size of the balloon payment is determined by the ‘Guaranteed Future Value’ (GFV) of the car – also known as the ‘Guaranteed Minimum Future Value’ (GMFV).
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.
There are two types of credit search: soft and hard. A soft credit search is an initial look at your credit file and will not show up to other lenders. This means it does not impact on your credit score. A hard credit search is where a company performs a complete search of your credit file. A hard search will be recorded on your file and therefore it is important to keep hard credit searches to a minimum over a short period of time as too many searches can affect your ability to obtain credit.
Your Credit Score is used by lenders to help determine how well you manage your finances, your history of repaying credit and the level of risk of lending to you. The credit score range can vary between the different credit referencing agencies. With Experian, a well-known credit referencing agency, your credit score can range between 0 and 999. Lenders will take your credit score, your application and existing data (if you’re already a customer) to determine whether to accept your finance application or not. Click to find out more about the Experian Credit Score ranges.
A Credit Agreement is a legal contract between you as the customer and the company who you are obtaining credit from. Credit Agreements are covered by Consumer Credit Act 1974, which protects your consumer rights when taking out a credit agreement, including: the type of credit agreement you’re entering into; the cost of the credit, including any interest rate charges; the amount you’ll have to pay; when payments are due; your right to cancel; conditions involving early repayments.
A County Court Judgment (CCJ) is a type of court order 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. It is important that you do not ignore a County Court Judgement. If you don’t pay off a CCJ within 30 days of the judgment being issued, it will remain on your credit record for six years. This can seriously affect your ability to obtain credit in the future.
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.
The Consumer Credit Act 1974 is a piece of legislation which regulates consumer credit, including how it should be managed and marketed. It applies to companies offering credit to individuals, sole traders, partnerships and unincorporated associations. Most businesses that broker or lend credit to consumers are also expected to be licensed by the Financial Conduct Authority (FCA). The act covers things like your right to cancel; your right to withdraw from an agreement; credit obtained at distance (such as via the internet); purchase protection; method of calculating credit; and marketing of credit offers, to name a few!
Commonly known as a Doc Fee, this fee covers the cost of filling out and issuing all of the paperwork involved within the car finance application process. This cost is included in the total amount payable and taken into account when calculating the Annual Percentage Rate (APR).
Depreciation is the amount of value a car loses over time, or the difference between the amount you purchased your car for and the amount you can sell it for. Many brand-new cars will lose between 50-60% of their value in the first three years, although this starts to slow down as the car gets older. Depreciation is often over-looked but is a consideration if you’re expecting to change your change your car quite often – in this case, it is worth looking for a make/model that depreciates slowly, whilst also keeping the car well-maintained.
Default interest is the higher interest rate that a borrower must pay if they default on their monthly payments. If a borrower defaults on a loan, they must pay default interest on the amount that was not paid in order to compensate the lender for the added risk and additional cost incurred of extending credit to them.
This is the initial lump sum cash payment that you can put down at the start of the finance agreement. This will be deducted from the total amount of credit you borrow and helps to reduce your monthly payments as you pay less interest on the amount borrowed. A deposit will be required dependent on the type of finance you go for. If you have a bad or poor credit profile, you are more likely to need a deposit, although there are sometimes no-deposit finance options available.
In the context of car finance, equity is the difference between the amount you sell your car for and the outstanding finance left on your agreement. Where you are able to sell your car for more than the outstanding finance, this is called ‘positive equity’. However, if you owe more on the finance than the value of the car, this is called ‘negative equity’.
A loan with a fixed interest rate means that the interest rate is set at the beginning of the agreement and does not vary throughout the agreement, regardless of fluctuations in the market. Most car finance agreements come with a fixed interest rate, allowing you to budget for your monthly payments.
The Guaranteed Future Value (also called the Guaranteed Minimum Future Value) of your car is set at the start of a PCP finance agreement. It is based on various factors such as the length of your car loan, your expected annual mileage, the car’s final condition and the car’s projected retail value at the end of the finance plan. If you decide to keep your car at the end of the agreement, you’ll have an optional final payment, which is equal to GFV. This is often referred to as a ‘Balloon Payment’. If you decide to part exchange your car, positive equity can be used as a deposit towards your next car on finance.
A guarantor is a third party, usually a trusted family member or close friend, who agrees to pay your finance agreement where you can no longer keep up with the repayments yourself. A guarantor is often required for younger borrowers with minimal credit history or those with very bad credit. Guarantor loans are a big responsibility for both parties. Should you fail to make the repayments, your Guarantor will become liable for the debt. Should your Guarantor also fail to make the repayments, both of you could be issued with a County Court Judgement (CCJ), risking damaging both of your credit profiles.
An HPI check is a comprehensive and up-to-date report carried out on a used car by hpi.co.uk. An HPI check uses data from the police, DVLA, manufacturers, and other industry bodies to deliver a report on the car’s history. It will check whether the car has been in an accident or written off, or whether it has been stolen, cloned, cut ‘n’ shut, or clocked. It also checks for outstanding debt, such as car finance or logbook loans. An HPI check provides peace of mind that you get what you think you are buying, with no nasty surprises!
Where you finance a car with a Hire Purchase agreement, you normally pay an initial deposit and then pay off the entire value of the car in monthly instalments. Over the term of the agreement, you effectively hire the car from the lender. At the end of the agreement, so long as you have made all of the monthly payments, you have the option to purchase the car. This involves settling a final ‘option to purchase’ fee and then you own the car.
In the case of car finance, an interest rate is the amount of money you are charged for borrowing money. This is worked out as a percentage of the total loan. The interest rate you are offered is influenced by your credit score. In general, the better your credit score, the less interest you will be charged since you present a lower risk to the lender. This article covers ways you can improve your credit score, which can lead to lower interest rates when you apply for car finance.
A lender (often called a funder) is a company that lends money to a borrower with the expectation of repayment in an agreed time, usually with added interest. There are numerous lenders in the car finance market. For example, some are bad credit specialists, others might focus on certain types of motor vehicle, such as motorhomes. It can be helpful to use a car finance broker since they will have the best knowledge of which lender to send your application to, based on your circumstances and requirements.
Negative Equity is where the current value of your car is less than the amount you have outstanding on your finance agreement. For example, if the value of your car is £5000 but you still have £6000 left to pay off, you are classed as being in negative equity. This can be frustrating, especially if you want to get a new car on finance. Some lenders will transfer the amount outstanding onto a new agreement, so it is worth exploring this avenue.
When all the repayments have been made on a finance agreement, usually Hire Purchase, you will be given the option to buy the car and own the car outright. To complete the purchase, you’ll need to pay the ‘Option to Purchase’ fee, which covers the administrative cost to the finance company of transferring ownership of the car to the customer.
The Representative APR allows lenders and brokers to advertise their finance products in a way that lets you easily compare their rate against other offers. Since every customer is offered a different rate dependent on their credit rating and individual circumstances, the Representative APR advertises the rate that the majority of their customers (at least 51%) will get. This means that 50% of their customers are likely to get a better rate than the Representative APR and 49% of their customers will get a higher rate. The best way of knowing the exact rate you’ll be offered for your circumstances is to complete an application – with My Car Credit, this won’t leave a mark on your credit file.
The residual value of your car is how much it will be worth over time, or how much of its original value it will hold when you come to sell. Where a car has a strong residual value, this means it has lost you less money as it has depreciated. Residual values are especially important where you are considering taking out a PCP finance agreement as these can affect the monthly payments and final balloon payment.
A soft search is an initial search on your credit file that does not leave a visible trace to other lenders. 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. A soft search is a great way of finding out if you will be accepted for car finance (sometimes with an indication of the rate you will be offered) without risking a mark on your credit file.
A secured loan is borrowing that is secured against an asset. With car finance, the agreement is secured against the car. This means that if you do not keep up your repayments, the lender can repossess the car in order to get their money back. Whilst this may sound undesirable, it does mean that you’re more likely to be accepted for car finance whatever your circumstances due to the reduced risk for the lender. Should you find yourself in the position where you cannot keep up repayments, it is important that you contact the lender to discuss a revised payment plan. Often, they would rather be paid for the finance than have to repossess the car.
SECCI stands for Standard European Consumer Credit Information. This document provides you with a comprehensive overview of your credit agreement. It also allows you to easily compare one finance product against another. The SECCI includes the key features of your car finance agreement, including the type of credit you have and how much, the duration of the credit agreement, cost of repayments, other costs associated with borrowing, and different rates of interest. The SECCI is provided to you before you sign your finance agreement and it is important that you read it thoroughly before going ahead.
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.
Loan underwriting is the process of assessing all of the information you provide within a finance application, along with your credit file and personal circumstances, to determine the risk of lending to you. Underwriters assess your ability to repay the loan, along with ensuring that you meet the minimum loan criteria. Underwriting can be an automated process using clever technology to score your creditworthiness. However, in certain cases, underwriting will be a manual process and additional proofs and documents may be requested to make a final decision. Whichever method is used, it is heavily regulated process and at My Car Credit, our goal is always to achieve the best outcome for our customer.