Car finance glossary
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Adverse credit
If you have missed or made late payments to your credit agreements, if you have had any defaults or CCJs (County Court Judgments), these events are likely to be recorded in your credit file by the Credit Reference Agencies. Your credit file is used by lenders when they make decisions about whether to offer credit. If you're affected by a bad credit history, it can make finance harder to find and more expensive. There is no such thing as a “blacklist” and it doesn't mean you can't get a loan - but it does mean talking to a specialist like Think Cars could be a good idea.
APR (Annual Percentage Rate)
The APR tells you the cost of a loan as a yearly rate over its full term. It includes all interest and some other charges and must be calculated in the same way by all lenders – this means you can confidently compare the cost of different products.
Balloon payment
A deferred lump sum payment due at the end of a car finance agreement, this is typical in PCP (Personal Contract Purchase) agreements and can be found in some HP (Hire Purchase) agreements. The amount you pay is the 'Minimum Guaranteed Future Value' – by deferring payment of this amount until the end of the agreement, the monthly repayments are significantly reduced. You can then make the optional payment at the end of the agreement to purchase the car.
Bad credit history
See 'Adverse credit'.
Cost to change
How much it would cost to change your car during your finance agreement, based on the difference between what your current car is worth and the cost of the replacement car.
Credit agreement
A contract between a borrower and a lender, includes Hire Purchase or Personal Car Purchase agreements, for example. You receive the finance you need to purchase your vehicle and agree to repay the amount borrowed over an agreed term, usually with interest on the terms specified in your agreement.
Credit rating / Credit record / Credit history
When deciding whether to accept an application for a loan, credit companies will use information held by the Credit Reference Agencies (such as Experian or Equifax) which detail your financial 'track record'. It includes details of what loans you have had previously, the current status and how you have managed your finances in the past.
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Depreciation
How much the value of your car reduces over time due to general wear and tear, mileage and simple age.
Equity
The positive difference between the value of an asset (in this case, your car) and the amount outstanding on the finance you used to buy it.
Flat rate
This is the monthly interest rate charged on the amount borrowed over the term. It does not take into account the reduction in the capital when payments are made so does not accurately reflect the total cost of lending. Flat rates should not be confused with APR.
Fixed rate
The rate of interest being charged in fixed rate agreements remains the same throughout the entire agreement regardless of any changes that might happen to the base rates.
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GAP (Guaranteed Asset Protection) Insurance
Gap Insurance is designed to cover you against any 'shortfall' in the difference between the amount your car insurance company pays if your car were to be stolen / written off and the amount you still owe under your finance agreement. For more information, please visit our car insurance section.
Hire Purchase
A type of credit agreement where the finance is secured on the vehicle you buy. You make regular monthly payments over an agreed repayment term – you may need a deposit. Once the term has finished and you've paid everything you owe, the car is legally yours. For more on this, click here.
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Minimum Guaranteed Future Value (MGFV)
Based on the lowest amount your car is guaranteed to be worth at the end of your finance agreement, in Personal Contract Purchase agreements this amount – less any deposit you paid – is the amount that is deferred to the end of the agreement and can be paid as a lump sum balloon payment to secure the car.
Negative equity
If you owe more on your finance agreement than the value of your car (see 'Equity').
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Part Exchange
When you exchange your current car towards part of the total value of the car you're purchasing.
Payment Protection Plan (PPP)
Insurance cover that can make the monthly payments to your car finance for you if you're unable to work through illness, accident or unemployment.
Personal Contract Hire (PCH)
Hire your car (rather than buying it) with a series of regular monthly payments over an agreed period. At the end of the agreement, you simply hand the car back when you can take out a new agreement or simply walk away. For more on this, click here.
Personal Contract Purchase (PCP)
A type of credit agreement where the finance is secured on the vehicle you buy. Lay down a deposit and pay the remainder over the term of the agreement. At the end of the term, you can choose between buying the car (by paying the rest in one go) or simply giving it back. For more on this, click here.
Poor credit history
See 'Adverse credit'.
Residual value
The value of a used car after depreciation, mileage and its general condition has been taken into account.
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