Car finance terminology: a complete glossary

Car finance can be a confusing topic and there’s nothing more annoying than trying to understand a multitude of abbreviations - Octane Finance to the rescue! 

In our jargon busting guide, we explain what a balloon payment is, the value of equity, the point of gap insurance, and so much more. Our handy glossary will also help you understand the many acronyms you’ll come across in the world of car finance, such as PCP, APR, and GFV amongst others.

A complete glossary of car finance terms

We’ve listed our complete glossary of car finance terms in alphabetical order for ease of reading - why overcomplicate things even more! Scroll down to see more… 

APR

APR stands for Annual Percentage Rate. As the name suggests, APR is the interest that’s charged on a yearly basis if you are to borrow money from a bank or specialist lender. The percentage rate can vary, so APR is very much an indication of how much you could pay back alongside other fees during the loan term. 

Understand more about APR and the various types available by reading our blog dedicated to the topic.  

Arrears 

Arrears is the amount of money owed by a borrower to a lender and refers to the fact that the requested sum is being paid after its due date.   

Balloon Payment

In short, a balloon payment is the sum of money owed by a borrower to the lender at the end of a car finance agreement. By its nature, a balloon payment will be much larger than the previous monthly payments you would have been making. 

We explain more about car balloon payments and how they work in our blog dedicated to the subject.

Broker 

A broker is someone who negotiates between you as the borrower, and the lender, by having access to thousands of finance deals. Here at Octane Finance, we are a trusted and reliable broker working within the automotive industry which sources the best possible deals for car finance customers all over the UK.  

CCJ

CCJ stands for County Court Judgement and is issued to people who fail to repay money owed to a lender or business. An official court order in the UK, CCJ’s will remain on a person’s record for six years and is visible to lenders during a hard credit check.

Consumer Credit Act

The Consumer Credit Act (CCA) is an act of the UK parliament that was founded in 1974 to protect consumers. Its purpose is to ensure that finance companies are transparent in their dealings when it comes to lending money. The legislation is enforceable by law and taken very seriously.     

Cooling-Off Period 

All car finance agreements are required to come with what’s called a cooling-off period as outlined by the Consumer Credit Act. This means that as a borrower, you do in fact have 14-days to decide whether you wish to withdraw from the agreement for whatever reason. 

Credit Check

A credit check - also referred to as a credit search - is when a finance lender checks your credit history and current credit score to determine whether you are a trusted borrower or a potential finance risk. 

Lenders can check your credit behaviour in one of two ways; via soft or hard credit checks. A soft credit check is when a lender checks your credit history to understand if you’re a reliable borrower - this level of search doesn’t leave a mark on your credit file. A hard credit check is a more in-depth form of credit search and is visible to other lenders, so any negative findings may influence other finance companies' decisions. 

CRA 

CRA stands for Credit Reference Agency, which is an independent organisation that holds information relating to people’s credit history. There are three main CRA’s in the UK including Equifax, Experian and TransUnion. Each works in a slightly different way and allows UK residents to check their own individual credit score.

Find out more about the varying credit score models by reading our credit score scales explained blog.  

Credit Score

A credit score is a number assigned to every person to determine their credit worthiness. Based on a numbered scale between zero to 999, the higher the number the better the credit score and vice versa.

Discover more about credit scores, why you need one and how to improve your existing score by reading our helpful credit score guide. 

Deposit contribution 

Unlike the deposit you may make personally towards a new car, a deposit contribution is one that is provided by the vehicle manufacturer or the dealership from where you purchase the car. This amount will then be put towards the upfront payment for your finance agreement. 

Document Fees

Document fees (sometimes referred to as doc fees or documentation fees) is a fee charged by some car dealerships and lenders to process the paperwork for a vehicle sale and/or car finance agreement.

Early Settlement

When a finance agreement is reached or fulfilled early, it is known as early settlement. It may be that the loan fee is paid in full so the borrower becomes the official owner of a vehicle, or the remaining amount is paid off early in order to secure a new finance deal instead.     

Equity

In car finance, equity is the monetary difference between what your car is actually worth and how much you owe in repayments. So, the resale value of the car will be different to what you are actually paying for it as the borrower.

Equity can work out to be positive or negative. Positive equity is when the value of your car is more than the amount you owe, whereas negative equity is when the value of your car is less than the amount you owe.

Excess Mileage

Excess mileage is when you drive over and above your mileage allowance which will be pre-agreed with any car finance agreement. If you are to go over your mileage allowance, the lender will charge a pence-per-mile rate which will be outlined in the contract.  

FCA

FCA stands for the Financial Conduct Authority which is a regulatory body for the financial services industry in the UK.  

FOS

FOS stands for the Financial Ombudsman Service which was established in the UK in the year 2000. The service is designed to settle any complaints between consumers and businesses that provide financial services, like a car finance lender. 

GAP Insurance

GAP stands for Guaranteed Asset Protection. It is designed to cover the difference in price between what the car is worth and what your car insurance company would pay out on the value of the vehicle should it be written off.  

GFV or GMFV

GFV stands for Guaranteed Future Value - it is also sometimes referred to as GMFV which stands for Guaranteed Minimum Future Value. Often confirmed by a lender at the start of a car finance agreement, it is the predicted depreciation of a vehicle - this will then go on to influence the final balloon payment settled at the end of a contract. 

Guarantor 

A guarantor is someone who acts on your behalf to secure a loan such as car finance. This may be required when you have a bad credit score or poor credit history, so it is likely a guarantor will be a close family member.   

Hire Purchase

Hire Purchase (known as HP for short) is a form of car finance which works much like an instalment plan. As the name suggests, a Hire Purchase agreement means you are paying to hire the car from the lender during the agreed period of time. Once all the repayments have been made you'll be given the option to eventually own the car.

HPI Check

HPI stands for Hire Purchase Investigation and is a comprehensive vehicle history check made prior to purchase. Many used car dealerships will perform an HPI check on individual stock so the buyer is aware of its history.     

Interest

Interest is the amount of money you’ll be charged for borrowing from the lender. Interest rates for loans can either be fixed or variable. A fixed interest rate is exactly what it says - fixed for the duration of your contract. Variable interest rates are subject to change and can rise or fall during the term.  

Joint Application 

A joint application is where more than one person applies for a loan such as car finance. This means both peoples credit history is taken into consideration and they are equally responsible for paying back the money borrowed.    

Lease Purchase 

Lease Purchase (known as LP for short) is a car finance option that is tailored towards borrowers wishing to purchase a more premium brand of vehicle; an initial deposit is required at the start of the agreement, followed by monthly repayments. At the end of the contract, you’ll be required to purchase the car by settling the final balloon payment.

Lender 

A lender is someone that lends a person money in order to fund a new vehicle purchase. By return, the borrower signs up to a contract to pay back the amount in full plus interest during a monthly repayment agreement.

Net Income

When you make an application for car finance, it is likely you’ll be asked to provide details of your net income. This is the amount of money you earn per month (or per year) minus expenses such as tax, national insurance, and pension contributions among other deductions.    

Optional Final Payment 

An optional final payment is most associated with a Personal Contract Purchase (PCP) car finance deal, and allows the borrower to make a final repayment amount in order to buy and own the vehicle. Depending on the literature in your contract, this may also be referred to as a final balloon payment. 

Part Exchange

Many car dealerships will allow part exchange deals which means you can trade in your current car in order to purchase a new one. It’s a great way to reduce the cost of a new vehicle as the value of your existing car will be taken off the purchase price of the next one.       

PCH

PCH stands for Personal Contract Hire which is essentially a form of long-term car rental. PCH is an ideal finance solution if you are a driver that isn’t bothered about whether you own or keep the car at the end of the agreement. 

Sometimes referred to as a personal lease, a PCH agreement requires the borrower to make fixed monthly payments during an agreed period of time. 

PCP

PCP stands for Personal Contract Purchase and is a form of car finance. A popular choice among drivers, PCP is a loan scheme designed to help motorists afford a car without having to pay for it outright. 

Check out our blog which highlights the best ways to finance a car to understand more about PCP and how it works. 

Refinancing 

Refinancing a car is only possible if you already have an existing finance deal in place. This means that as the borrower, you’ll take out a new finance agreement which is usually to help pay off the existing amount owed. 

We explain more about the growing trend of car refinance in our blog dedicated to the topic. 

Repossession

Anyone who enters into a car finance agreement is at risk of having their vehicle repossessed by the lender if they do not keep up with the pre-agreed monthly payments.

Representative APR

Representative APR (Annual Percentage Rate) refers to the interest rate offered to at least 51% of applicants who wish to secure finance at the advertised rate. 

Residual value 

Residual value refers to what your car will be worth at the end of your finance agreement. A lender will calculate this cost to understand the resale value of the vehicle when you hand it back. 

Termination Fee

If you enter into a car finance agreement and wish to end the contract early, then this will be subject to a termination fee which will be outlined in the smallprint.

Underwriting 

Underwriting is when a lender needs to verify your financial history. An underwriter expert will be tasked with assessing your income, outgoings, any debt and previous loan history to establish that you’re a secure borrower before the car finance deal is finally agreed.     

Zero Deposit

Zero deposit car finance (also known as no deposit car finance) means that as a borrower, you won’t be required to contribute anything towards the car upfront. 0% finance deals can be hard to come by but are available; bear in mind that by not paying a deposit, the monthly repayments will be much higher than if you were to make an initial contribution.   

If there’s a car finance term we’ve not covered, then get in touch and we’ll be more than happy to add it to the list!