Understanding Car Finance Terms

Our guide to understanding finance terms when buying a car

At Sytner Group, we want you to be fully informed about all aspects of your finance application. That's why we've produced this guide to help you understand the terms used in finance applications.

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APR

APR means Annual Percentage Rate. It is the cost of borrowing money over a year on a credit agreement. It takes into consideration any fees and interest charges which will help you to compare the cost of finance from one credit / loan provider to another.

Balance to Finance

The 'Balance to Finance' is simply the amount of money you wish to fund with a credit agreement in order to gain use and possession of your next car. Typically, the funded amount is:

(1) the cost of the car (plus any optional extras you decide to purchase) LESS

(2) Your deposit (or any deposit contribution available on a financial promotion)

Credit Broker

Also refered to as the Credit Intermediary, this Company introduces you to the lender who will arrange funding for you.

Credit Charge

The credit charge is a pounds and pence amount showing how much you will pay the lender on top of the amount you borrow in total if you choose to proceed.

Credit Score

A credit score (also referred to as a credit rating) is a number issued by credit reference agencies and used by lenders to determine your creditworthiness. Your credit score is calculated from a number of different factors, such as how much you earn, how many credit agreements you have in place and how good your history of paying these off. Lenders will look at your credit score to make a decision on whether to lend money to you.

Deposit

A deposit can either refer to a finance deposit or a vehicle deposit.

Depreciation

As cars get older and are used more, they will become less valuable to sell. This is known as depreciation.

Early and Partial Settlement

This is the option that allows you to either make a full payment to clear all outstanding credit OR the option to pay a sum of money to reduce the amount of credit, which will typically result in a lower monthly repayment and lower interest charges over the full term of the agreement. The amount of money that can be repaid for partial settlement will vary by lender.
Note that partial settlements are only available on regulated contracts. I.e. private individuals borrowing less than £60,260.

Equity

Unfortunately, most cars will depreciate over time.

Equity is the difference between the market value of the car and any remaining balance outstanding on a credit agreement (called the settlement figure). Two examples are shown below:

(1a) Market Value of Car - £5,000

(2a) Settlement Figure (amount required to clear outstanding finance): £4,000

(3a) = Positive Equity of £1,000 (1a minus 2a)

(1b) Market Value of Car - £5,000

(2b) Settlement Figure (amount required to clear outstanding finance): £6,000

(3b) = Negative Equity of £1,000

Excess Mileage

Excess mileage charges are payable if you fund your car with a PCP or Contract Hire agreement, you go over your pre-agreed mileage allowance and you choose to return the vehicle to the lender.

The excess mileage charge is calculated at a pence per mile rate. Put simply, the more you go over your pre-agreed mileage, the more it will cost you in excess mileage charges so you must always ensure the contractual mileage (the mileage that is shown on your credit agreement) is right for your driving circumstances.

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Finance Deposit

When you apply for credit, you will find that some finance products may have a minimum and a maximum amount of deposit allowed. In simple terms, the more deposit you put towards your credit agreement, the less interest you will pay overall.

Finance Deposit Contributions

From time to time, car manufacturers, finance providers and retailers may offer finance promotions such as deposit contributions in an attempt to reduce the overall cost to customers who are looking to fund their next vehicle. This is typically called a Finance Deposit Allowance or Contribution.

Lender

The lender is the company that will assess and approve your credit application. It is important to know that when you fund your car on finance, the lender will own the vehicle until you have paid all the required monthly repayments.

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Optional Final Payment/ Guaranteed Minimum Future Value/Balloon Payment

If you fund your vehicle with a PCP agreement, the lender will set a Guaranteed Minimum Future Value (GMFV) at the start of your finance agreement which will be determined by many factors including duration of agreement and contractual mileage. You may hear this being referred to as the 'GMFV', the optional Final Payment, or the Final Balloon Payment. They all refer to the same thing which is the amount of money still left for you to pay should you wish to purchase the vehicle outright (as is one of the options you have when funding via a PCP agreement).

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Rate of Interest

With most credit agreements, you will be charged interest and this is no different when you choose to fund a car on finance. The lender will set the interest rate (or the rate of interest) and they will often show the rate of interest in 2 ways:

(1) As a 'True' rate OR

(2) As an Annual Percentage Rate (APR)

So, in simple terms, the interest rate is the amount you will be charged for borrowing money, which is shown as a percentage of the total amount of the credit agreement/loan.

Representative APR

APR can help you compare lending products, such as loans or credit cards, on a like-for-like basis.When a loan is advertised with a representative APR, it means that at least 51% of customers must receive a rate that is the same as, or lower than, the representative APR.

Right of Withdrawal

For regulated credit agreements, you have the right to change your mind and you can cancel (withdraw) from the credit agreement within the first 14 days of the credit agreement becoming 'live'. Whilst this gives you the option to withdraw from the credit, it does not mean you can withdraw from the vehicle sale (which will still need paying for) or any additional products you may have funded. Should you wish to exercise your right to withdraw from the credit agreement, you will need to contact the lender to do this.

Note this option is not available to customers funding in excess of £60,260 or agreements funded through a business (i.e. Limited Companies).

Term

This is the length of time that you want to spread the cost of the financing your car over, and is usually referred to in the number of months. You will normally be able to choose the length of the term of your finance agreement, within a set minimum and maximum period.

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Vehicle Deposit

Vehicle deposit is the amount of money you will pay to the Retailer in order to secure the sale of the car (i.e. to avoid it being sold to another customer). This is different to the Finance Deposit