Car Finance terms aren't always explained very well so here at Visitcars we've provided you with a list of all the key car finance terms and their definitions, making it easier for you to decide on the best way to finance your car

Adverse Credit

Adverse credit refers to a person who has a less than perfect credit rating due to missed payments, CCJs, etc. When it comes to applying for car finance, this can affect your chances of getting a low-rate loan.

APR

Annual Percentage Rate (APR) is the way in which to calculate the cost of the loan each year. The APR represents the total amount charged for credit

Bad credit history

Bad credit refers to people who may have had financial problems in the past, including loans, credit cards, CCJs, IVAs etc. Many providers will still offer car finance.

Balloon payment

Balloon payments are particularly relevant to people buying cars on the Personal Contract Purchase PCP method. It refers to the final payment needed to secure ownership of the car, and can make up a significant percentage of the vehicle.

Contract Hire

Contract Hire is one car finance option. It refers to the leasing of a vehicle for a set period of time, for which the customer pays a monthly leasing fee. This is generally less than hire purchase because at the end of the repayment period there is no option of ownership

Cost to Change

Cost to change refers to how much it would cost to change your car. This amount is calculated by the difference between the value of your existing vehicle and the price of a replacement car

Credit Agreement

The credit agreement is a clear contract between yourself and the lender. The credit agreement guarantees that you will receive the loan on your car, and also that you agree to pay off the loan at the required rate and at the required time. Normally, there is a ‘cooling-off’ period during which you can cancel the agreement

Credit Rating

Your credit rating affects whether you are entitled to a loan and on what terms. Your credit rating will be assessed depending on how much you are earning and whether you have had credit arrangements in the past

Depreciation

Most cars depreciate, unless they become a collectable. As time passes, cars become less valuable. Depreciation refers to the extent to which a car has lost value. Our credit rating affects whether you are entitled to a loan and on what terms. Your credit rating will be assessed depending on how much you are earning and whether you have had credit arrangements in the past

Equity

Equity refers to the difference between the value of the car, and the remaining sum left to pay on the loan.

Finance Lease

A Finance Lease is method of repayment, where the monthly rental is determined by how much the car costs, how long the lease runs for, and how much (estimated) the car will be worth in the future based on the proposed annual mileage

Fixed rate

Fixed rate means a loan on which monthly repayments are fixed. They will not fluctuate in line with normal interest rates

Flat rate

Flat rate is the monthly interest rate. Finance providers may quote the flat rate instead of the APR because it sounds cheaper

Forecourt finance

Forecourt finance may be offered by car dealers as and when you purchase a car. However, the rates offered are rarely the best on the whole market, and it is always worth shopping around for car finance to find the best deal

Gap Insurance

If your car is writen off, you will be eligible to repay the remainder of the car loan. Car insurance usually only pay out the value of the car at the time of the accident or theft; this may actually be less than the money outstanding on the car loan. Gap insurance has been designed to fill this gap, and is offered as an extra on most car finance agreements.

Hire Purchase

Hire purchase is a common type of car finance. When taking out hire purchase, you pay an initial deposit, then a fixed monthly repayment. Although you can drive the vehicle away, you don't actually own it until you make the final repayment and close the car finance deal

Lease purchase

Lease purchase is similar to hire purchase, and offers a flexible deposit, a flexible repayment period, not to mention a flexible percentage of the purchase price stored up for a final repayment.

Minimum Guaranteed Future Value (MGFV)

When you defer a percentage of the total cost of the car to the end of the contract, the value is assessed and termed the MGFV. The MGFV plus the deposit is subtracted from the selling price of the vehicle, and your monthly repayments are assessed on the balance of the money. Once the agreement matures, you can choose a final balloon payment to secure the car.

Negative equity

Negative equity is the amount of car finance outstanding on the hire purchase in relation to the present value of the car

Option to purchase fee

In some contracts, if you wish to keep the car at the end of the agreement you have to pay an additional charge to keep the car. When arranging the loan, make sure that you check how much this amount is and if it is an option.

Part Exchange

Part exchanging your old car as part payment for your new car is a common process. Some dealers may pay you over the odds for your old car in order to sell you a new car. Furthermore, some dealers pay you a minimum cash fee for part exchange.

Payment Protection Insurance

Payment Protection Insurance (PPI) is completely optional. PPI covers the borrower should they find themselves in circumstances that prevent them from making car loan repayments. This could include: inability to work, disability, unemployment, redundancy or serious illness. Check our payment protection insurance

Personal Contract Hire

PCH is similar to contract hire, but is more suited to the individual. Anyone who wants fixed cost motoring or is leaving a company car scheme should consider PCH. This finance option is good because it covers services, repairs, depreciation and disposal.

Personal Contract Purchases

Personal contract purchases (PCP) is a newer type of car finance, offered as an alternative to hire purchase loans. The vehicle is leased once a deposit is paided. The cost of the car is not spread over the loan period, meaning lower monthly repayments. When the loan comes to an end you can either pay a balloon payment, return the car to the dealer, or part exchange the car for a new car

Personal Lease

A personal lease is effective if you want to rent a car over a long period of time. When it comes to the end of the agreement the car is returned to the dealer. During the lease, some services should be included. The finance agreements are based on how many miles you expect to cover each year it is worth being aware of this amount because going over it can cost.

PResidual value

Once all of the factors that lessen the value (depreciation, condition and mileage) are taken into account, this is the value of your used car

Secured loan

The car loan or car finance is secured on the car. This means that if you fail to meet loan requirements the finance provider can repossess your car

Short term contract hire

Like contract hire, but available over a shorter term, usually up to a year: a useful stop-gap solution

Trade value

Trade value refers to how much the car is worth in a trade exchange

Unsecured loan

This is the opposite of an secured loan. The repercussions for not meeting the car loan requirements do not involve repossession, but they could affect financial history and credit rating

Variable rate

This means that the interest rate can go up and down depending on the national banks base rate as it fluctuates during the term of the loan