Last updated: 23/07/2020 | Estimated Reading Time: 5 minutes
Car finance jargon buster
A survey of 2,500 Brits showed that only 32% knew that HP stands for ‘hire purchase’. Meanwhile, 23% of those surveyed believed that PCH was a hallucinogenic drug - only 20% knew that PCH actually means ‘personal contract hire’. When it comes to car finance deals, there’s a lot of jargon that very few people besides car salesmen tend to know. If you want to clear up any confusion, here’s all the common car finance jargon that you need to be aware of.
In This Guide:
- APR (annual percentage rate)
- Msrp (manufacturer's suggested retail price)
- Balloon payment
- Conditional sale
- Deposit contribution
- Early settlement
- GAP insurance (guaranteed asset protection)
- Guaranteed minimum future value
- HP (hire purchase)
- Joint application
- Lease purchase
- PCH (personal contract hire)
- PCP (personal contract purchase)
- Residual value
- Secured loan
- Secondary rental
- Trade value
- Unsecured loan
APR (annual percentage rate)
This is the amount of interest that you pay annually on a borrowed product, like a loan or credit card. APR is often advertised at a representative rate rather than a real rate, meaning you can end up paying more than you intended to.
Msrp (manufacturer's suggested retail price)
This is the price that the vehicle manufacturer recommends that the retailer sells the vehicle for, also known as the suggested retail price.
This is the final payment that you can make at the end of a personal contract, for example a HP or PCP, that allows you to purchase and own the vehicle.
This is a type of car finance deal where the sale of the vehicle depends on you completing the terms of the agreement. For example, you must make all of your repayments and pay other charges. Conditional sales are similar to Hire Purchase agreements, but at the end of the contract, you automatically own the vehicle rather than paying an ownership fee.
Sometimes, a new car dealer will make a contribution to the minimum deposit payment required under a car finance deal. They would normally advertise this as part of a promotional or marketing campaign. This can help to reduce the cost of your car finance but is subject to you being approved for the finance agreement that the deposit contribution applies to.
If you pay off a finance agreement before the agreed term is completed, you may save on interest that would have otherwise been charged to you.
GAP insurance (guaranteed asset protection)
If your car is involved in an accident, then your insurer will only pay for its market value. This means that you can lose a lot of money, as cars tend to significantly depreciate in value after an accident. GAP insurance covers the difference between the market value of your vehicle, and the amount of outstanding finance you have on your credit agreement.
Guaranteed minimum future value
This is when a percentage of the car’s total cost is deferred until the end of the contract. The forecasted value of the vehicle is assessed by the finance company at the start of the agreement. With deals like Personal Contract Purchase, you must be realistic with your estimates of how many miles you expect to cover each year, as this will help determine GMFV.
HP (hire purchase)
You can hire a car by paying an initial deposit, followed with fixed monthly payments. There is also an ‘option to purchase’ fee at the end of the contract, which you can opt into if you want to own the car outright.
In certain circumstances, you might want to think about a joint application for car finance. This is when two or more people apply for car finance on one application. This can help to improve your chances of meeting a lender’s affordability calculations. It’s worth checking with your local dealer to see if this option is open to you.
This is a form of Hire Purchase agreement, under which a sum is deferred until the end of the contract. The size of the sum is determined by the projected age of the car, and its forecasted mileage. Unlike Personal Contract Purchase agreements, the deferred amount (see balloon payment) isn’t optional and always has to be paid.
A part-exchange involves trading in your existing car, using its value as a partial payment towards a new car. Sometimes this can help fund a deposit under a finance agreement.
PCH (personal contract hire)
PCH is a long-term lease agreement where you make monthly payments, then return the vehicle at the end of the contract. Your mileage is pre-agreed.
PCP (personal contract purchase)
Under PCP, fixed monthly payments cover part of the vehicle’s value. At the end of the contract, you also have an option to pay the rest in a final payment to keep the car. Alternatively, you can hand it back. Your mileage is pre-agreed.
The residual value of your car is how much it’s worth at the end of your contract. Sometimes residual value can be guaranteed by your finance company, but this depends on the terms of your contract. Residual value is determined by the resale appeal of your vehicle, as well as its mileage and the length of your finance agreement.
Most car finance agreements are secured against the vehicle in question. This means less risk for you and for the lender, as the car is recoverable in the event of payment difficulties. However, this does mean that the lender has more flexibility in what terms and conditions they can offer to you.
If you want to continue renting a car after a lease agreement is completed, you can normally arrange a second agreement for the same car. Normally this comes in the form of annual rental or monthly repayments.
This is how much a car is worth if it’s sold at an auction or bought by a motor dealer. Most non-prime finance companies will only lend you up to the maximum trade value of a vehicle.
An unsecured loan isn’t secured against any assets, like the vehicle in question. This means that the risks to the finance company are higher, so there will be less flexibility in the terms and conditions of the agreement.