The First Car - Finance - Glossary

Please click on a glossary item below for further information...

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 car finance, this can affect your chances of getting a low-rate loan.


Annual Percentage Rate (APR) is the way in which to calculate how much the loan will cost per annum. 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 have a car finance deal, but expect higher rates and repayments.

Balloon payment

Balloon payments are particularly relevant to people buying cars on the 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.

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. However, if you have already signed at a dealership, this period may be waived.

Credit Rating

Your credit rating affects whether you are entitled to a loan and at 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.

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, etc. because at the end of the repayment period there is no option of ownership.


Most things depreciate, although some do appreciate in value over time. Unfortunately, many cars do not, and will become less valuable as time passes. Depreciation refers to the extent to which a car has lost value.

Early Repayments

Early repayments are payments made prior to the end of your car finance or lease deal in order to reduce the amount of money owed.


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

Flat rate

Flat rate is the monthly interest rate. Lenders and finance providers may quote the flat rate instead of the APR because it sounds cheaper be aware.

Finance Lease

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

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 or having someone else shop around for you!

Gap Insurance

If you write your car off, you will obviously still be eligible to repay the remainder of the loan. Normally, insurance will pay only the value of the car at time of accident or theft; this may actually be less than the money outstanding on the 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 an easy and common form 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.

Manufacturer's deals

Although usually limited to new cars, special promotions and certain models, dealers and manufacturers special offers can be of interest. Lenders will often try to entice customers with low interest or interest free offers..

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

This unfortunate situation occurs when the car you have bought with a car finance deal is worth less than the amount of money remaining to pay off the loan.

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.

Part Exchange

Part exchanging your old vehicle 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

PPI is completely optional. It is worth remembering this, because this extra bolt on has caused much controversy in the car finance market. PPI covers the borrower should they find themselves in circumstances that prevent them from making loan payments. This could include: inability to work, disability, unemployment or serious illness.

Personal Contract Hire

PCH is like contract hire, but is more suited to the individual ahead of the business. 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. Private individuals cannot claim VAT, however.

Personal contract purchases (PCP)

PCP is a more recent type of car finance, offered as an alternative to hire purchase loans. The vehicle is leased from the dealer after a deposit. 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 another vehicle.

Personal Lease

A personal lease is an effective way of renting a car over a long period of time. When it comes to the end of the agreement you return the car 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. Some deals include the option to buy the car at the end of the lease.

Residual 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

An asset such as a car or house guarantees secured loans. 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 stopgap solution.

Trade value

Trade value refers to how much the car is worth in a trade (usually lower than retail value or private sale.)

Unsecured loan

This is the opposite of an unsecured loan. The repercussions for not meeting 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 normal interest rate during the term of the loan.

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