Making the choice to purchase a car using car finance can be a daunting task.
When arranging finance for your next new car, it is likely that you may come across some phrases that you may not have heard before.
It is very important that you, as the consumer, understand all of the terms and conditions before signing on the dotted line.
To help you with this, My Car Credit have created a guide consisting of some of the most common phrases that you may come across throughout your finance application.
This is the length of time that you agree to pay the finance over, this is usually between 24 and 60 months.
In some finance agreements such as Personal Contract Purchase (PCP) and Lease Purchase (LP) you will be asked what you estimate your annual mileage to be. The annual mileage estimates helps the lender to calculate the market value of the car at the end of the finance agreement. It is important to be truthful and realistic because you will be charged per mile if you exceed your stated mileage.
Bad Credit History
This terms refers to people who may have experienced repayment issues in the past and therefore do not have a great credit rating. You can check your credit rating with reference agencies including Experian and Equifax. If you have adverse credit there are specialist lenders who can still help you.
A balloon payment is the lump sum (also known as a Guaranteed Minimum Future Value) deferred to the end of a finance agreement in Personal Contract Purchases, Lease Purchases or similar agreements. It completes the finance agreement and allows you to take ownership of the car. You may be obliged to pay a balloon payment under some agreements, while it is optional under others – so be sure to check which type of agreement best serves your needs.
A Credit Agreement is a legal contract between you as the customer and the company who you are obtaining credit from.
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.
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.
Depreciation refers to the extent and speed of the loss of value, and some cars will depreciate much quicker than others.
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.
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.
This is when a customer pays off a finance agreement before the agreed term is completed. By doing so the customer may save on the interest that would have been charged for the remainder of the agreement.
Once you have paid all of the monthly payments for your car, you become the owner and your car becomes your equity.
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.
This is the base interest rate charged on the finance. Dealers will sometimes quote a monthly or annual flat rate, but you should always ask for the Annual Percentage Rate (APR), which more accurately describes the true cost of the finance. The flat interest rate does not include other charges like any administration fees.
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.
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.
This refers to your income before tax and National Insurance have been deducted. You may be asked for this information when completing a finance application.
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.
Car insurance is a legal requirement in the UK for motorists, and it will normally be a condition of a finance agreement that your car has comprehensive cover at all times.
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.
In some circumstances, you may want to consider a joint application for car finance. This is where two or more people apply for finance one a single application. This could improve your chances of meeting a lender’s affordability calculations.
A lender gives money to a borrower with the expectation of repayment in an agreed time, usually with added interest.
Your earnings after income tax and national insurance have been deducted.
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.
Personal Contract Purchase
Personal Contract Purchase (PCP) is a form of hire purchase agreement, which includes a voluntary “balloon” payment at the end. This final amount represents the future residual value of the car, based on the age of the vehicle at the end of the agreement and the forecast mileage.
Monthly repayments are generally lower under a PCP agreement than a comparable HP agreement because of this deferred amount. With this type of agreement, payment of the future value of the car is optional. All payments must be paid if you wish to own the car outright, but you could simply decide to hand the keys back and start another agreement for a different vehicle.
A quotation provides an indication of the costs that would apply if you went ahead with a finance agreement. The information shown in the quotation is prescribed by law and must include any deposit required, the monthly repayments, any balloon payment, the Annual Percentage Rate (APR), other charges and the total amount payable. Asking for a quotation does not commit you to entering into an agreement at a later date, and will not leave a ‘footprint’ on your credit record.
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 differ depending on their credit rating and individual circumstances.
This is the value of your car at the end of your finance agreement.
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.
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.
This is the length of time over which you agree to repay the amount of finance you have borrowed.
This is how much the car is worth if sold at auction or bought by a motor dealer. Most non-prime finance companies will only lend up to a maximum of a car’s trade value.
This means that the interest rate can go up or down depending on the Bank of England’s interest rate during the term of your finance agreement. This type of finance agreement is more common in the mortgage market.
Still seen something that’s confusing? Don’t worry! Our friendly team here at My Car Credit are always willing to help, you can call us on 01246 458 810 or email firstname.lastname@example.org. It’s what we’re here for!