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  2. Personal Finance Glossary
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Personal Finance Glossary

Planning on financing your new or used car? To help with this, we have created a glossary of common car finance terms.

Amount of credit is the amount that you borrow from the finance company under your finance agreement. This amount does not include any deposit or a part exchange value of your current vehicle that you put towards the new vehicle.

Annual Percentage Rate (APR) is the total rate of interest charged each year based on the outstanding amount of money you borrowed. It will determine how much money you will need to pay on top of the loan amount. The APR is usually higher than the flat interest rate because it may include necessary fees, like administration and acceptance fees, in addition to the flat interest rate.

Cost of credit includes interest, fees and charges you pay to borrow the amount of credit from us.

A deposit is the money you pay as a cash payment at the start of a finance agreement. The amount you pay for the deposit will affect the amount you need to borrow because any deposit amount will be deducted from the price of the vehicle. A deposit amount may not be required, and a deposit may influence how much credit the finance company will agree to under a finance agreement.

A deposit contribution is an amount of money that a vehicle manufacturer, dealer or finance company contributes to your deposit. It will help lower the amount you need to borrow and, as a result, the cost of your monthly payments will be reduced. It is essentially a contribution to the cost of your vehicle. Any deposit contribution must be returned by you if you cancel your finance agreement.

Depreciation is the decrease in the market value of a vehicle over time, from when it is financed to when it is sold. Vehicles usually lose value over time because they age, they've been driven for many miles, they are less in demand, or may have been damaged.

Equity is the difference between the outstanding amount of money you owe to the finance company and the resale value of the vehicle. You have positive equity if the market value of the vehicle is greater than the amount you owe. You have negative equity if the amount of money you owe is greater than the market value of the vehicle.

 

Example of positive equity:

Amount of money owed = £10,000

Resale value of vehicle = £12,000

Equity = £2,000

 

Example of negative equity:

Amount of money owed = £10,000

Resale value of vehicle = £9,000

Negative Equity = £1,000

At the beginning of your finance agreement for Personal Contract Purchase (PCP) or Personal Contract Hire (PCH), you will need to consider your expected average mileage that the vehicle is likely to be driven each year. Based on this a mileage limit will then be stated in your finance agreement. This will impact your monthly payment amount. If you exceed this mileage limit, there will be an excess mileage charge at the rate specified in your finance agreement. At the end of the finance agreement, any excess mileage charge will be payable if you choose to the return the vehicle, but it will not be payable if you choose to buy the vehicle (if the type of finance agreement you have gives you the right to buy the vehicle).

Fair wear and tear is when a vehicle's condition gets worse over time due to normal usage of that vehicle. Fair wear and tear takes into account the age, mileage of a vehicle and whether it has been looked after with sufficient care. Any vehicle returned to us should be in good working order, good condition, and good repair. Any loss of or damage to the vehicle other than fair wear and tear will be your responsibility. Our representative will assess the vehicle in line with the current BVRLA Fair Wear and Tear Guide. Any items outside of this acceptable range will be charged to you.

A fixed rate of interest is the rate of interest that will remain unchanged for the term of your finance agreement. It is applied on an annual basis to the amount borrowed.

The Guaranteed Future Value (GFV) is the stated value of the vehicle at the end of your Personal Contract Purchase (PCP) finance agreement. It is the final payment you would have to make to take ownership of the vehicle at this point. The finance company determines the value of the GFV at the start of your finance agreement, taking into account the retail price of the vehicle, the agreement term, and anticipated annual mileage. The GFV may also be referred to as the Optional Final Payment.

Hire Purchase (HP) finance is a way to hire the vehicle from the finance company and spreading the cost by paying monthly instalments, instead of having to pay for the vehicle up front in a cash lump sum. Instead, you pay an agreed amount of rental money each month to hire the vehicle. The money you pay covers the cost of the vehicle; plus, extra money called interest. You won't own the vehicle until you make the final payment.

You may have the option of including a maintenance package if you take out a Contract Hire Agreement. If you take up and pay for this option, maintenance and repair services will be provided to address specific wear-and-tear and maintenance issues throughout the agreement. These services may include repairs, regular servicing and replacements for a lease vehicle if necessary, depending on the circumstances.

The MOT certificate confirms that the vehicle at the time of its test, passed the minimum acceptable environmental and road safety standards as required by law.  

The Option to Purchase Fee is a minimal amount which you may be required to pay at the end of your agreement to take ownership of the vehicle. It is specified by the finance company at the beginning of your Hire Purchase (HP) finance agreement.

The Optional Final Payment is the stated value of the vehicle at the end of your Personal Contract Purchase (PCP) finance agreement and is the final payment you would have to make to take ownership of the vehicle at this point. The finance company determines the value of the Optional Final Payment at the start of your finance agreement, taking into account the retail price of the vehicle, the agreement term, and anticipated annual mileage. The Optional Final Payment may also be referred to as the Guaranteed Future Value (GFV).

Part Exchange is the process when you use the value of your current vehicle towards the cost of your new vehicle. The dealer will look at the condition and age of your vehicle and provide a financial value, which you can use as part or all of a deposit towards the new vehicle.

Personal Contract Hire (PCH) allows you to use a vehicle for an agreed specific period. With PCH, you pay monthly rentals for a specific period of time to rent the vehicle. You hand the vehicle back at the end of your agreement. You will not have the option to buy or own the vehicle. A specified annual mileage limit applies over the term of the agreement.

Personal Contract Purchase (PCP) is a way to finance and use a new or used vehicle with the option to buy it at the end of your finance agreement. The finance company hires the vehicle to you, and you pay a specific amount of money each month for the term of your finance agreement. A specified annual mileage limit applies over the term of your finance agreement.

 

At the end of your finance agreement, you have the option to return the vehicle, upgrade to a new one, or pay the Guaranteed Future Value (GFV) to own the current vehicle.

At the end of your Personal Contract Purchase (PCP) finance agreement, you may be eligible for a refinance option which allows you to spread the cost of your Guaranteed Future Value (GFV) by extending your current finance agreement to allow you longer to repay the GFV amount. Refinance is only available on PCP and, if it leads to an increase in your monthly payment amount, may be subject to credit checks and a finance application. The interest rate, monthly payments, and/or agreement term may differ from your original agreement and could impact the total amount payable.

All vehicle finance companies are required to display a representative Annual Percentage Rate (APR) in their advertising. This is the interest rate the finance company expect the majority of customers to pay for the finance product. It could be different from the actual APR paid, which depends on a number of factors such as your credit history, personal circumstances and the amount you want to borrow.

A representative example shows the key components within a finance agreement, such as deposit, term, annual mileage and representative Annual Percentage Rate (APR). It is an example of how your monthly payments could be calculated and is a requirement for specific financial promotions.

Full settlement occurs if a customer decides to end the finance agreement, before its stated end date, by paying everything that is due to be paid at that point. A customer is also entitled, at any time, to pay back part of what is owed under the finance agreement.

 

The customer may be entitled to a rebate from the finance company if making a full or partial settlement, which the finance company will calculate using a standard formula.

Term is the length of your finance agreement in months. This length may be reduced if you exercise any termination, cancellation or purchase rights that may be available under your finance agreement before the end of your finance agreement.

Total amount payable is the total amount that you will pay under your finance agreement, which includes the amount you borrow, all charges, fees and interest, and any deposit that you may pay upfront.

The V5 or V5C document is also known as your vehicle logbook.  It is an important document issued by the Driver and Vehicle Licensing Agency (DVLA) and it contains specific details about the vehicle and the registered keeper details. It needs to be updated to reflect any major changes.

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