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Used Car Finance Jargon Buster
We believe it is our duty as a responsible used car dealer to ensure every customer fully understands the various finance products Motor City Plymouth offers prior to any loan agreement being taken out on our cars. So we've put together this handy car finance jargon buster to help you with any unfamiliar terms you might come across when considering used car finance from Motor City Plymouth:
Annual Percentage Rate (APR)
The APR shows the annual cost of taking out finance on top of the amount you borrowed initially for your used car. The APR will include interest rate charges and any other fees included in the agreement, such as administrative fees. APR is a great way to compare the cost of different finance products.
A balloon payment is the lump sum (also known as a Guaranteed Minimum Future Value) at the end of a finance agreement in Personal Contract Purchases, Lease Purchases or similar agreements. By paying the balloon payment, you will take ownership of the car.
The balloon payment may be compulsory under some agreements, while it is optional under others. Instead of paying the balloon payment and taking ownership of the vehicle, you can return the car (subject to condition) or you may be able to swap it for another vehicle.
A credit agreement is a legally-binding contract between the customer and the finance company. It must include details of the loan amount, the term, rates of interest, repayments, other charges and your rights and responsibilities for the duration of the agreement. You will receive a copy of the agreement you have entered into.
Your credit rating is determined by a number of factors including current debt including credit cards and loans, your income, your repayment history, your address and employment history.
An individual’s credit rating is a part of the scoring system used by finance companies to aid them in deciding how to price the risk of lending, and therefore helps them determine a suitable interest rate.
This means the same interest rate is charged for the duration of the agreement.
This is the base interest rate charged on the finance. Dealers will sometimes quote a monthly or annual flat rate, but you should always ask for the Annual Percentage Rate (APR), which more accurately describes the true cost of the finance. The flat interest rate does not include other charges like any administration fees.
GAP insurance (Guaranteed Asset Protection)
Most motorists are unaware that in the unlikely event that your car is involved in an accident and is written off, your insurance provider will only pay for its current market value.
GAP insurance can help cover the difference between the market value of the car and what is required to clear the outstanding finance under your credit agreement (known as Finance GAP). Alternatively, Return to Invoice GAP Insurance will make up the shortfall between the market value of the car and the original purchase price of the car.
Guaranteed Minimum Future Value
This is related to what the car will be worth at the end of the agreement, as assessed by the finance company at the beginning of the agreement - known as the Guaranteed Minimum Future Value. It is a percentage of the cost of the car, which is deferred until the end of the finance agreement (also known as Balloon Payment). Choosing a finance product that uses a balloon payment will offer lower monthly payment, as the repayments are based on the price of the car minus the GMFV.
In agreements such as Personal Contract Purchase, it is important to be realistic with your estimates of how many miles you expect to cover each year as this will help determine the GMFV (as well as the length of the agreement).
Hire purchase (HP) is a popular car finance product. When taking out an HP agreement, you pay an initial deposit, then a fixed monthly repayment over a set number of months.
Although you become the 'registered keeper' of the car, you are only hiring it and you don't actually own it until you have made the final repayment (including any administration or option to purchase fee).
Lease Purchase is a form of Hire Purchase agreement under which a sum is deferred until the end of the contract. This is determined by the projected age of the car and the forecasted mileage.
Unlike with Personal Contract Purchase (PCP) agreements, the deferred amount (also referred to as a balloon payment) is not optional and must always be paid. Therefore, when you take out a Lease Purchase agreement, you need to ensure that you will be in a position to afford the balloon payment at the end of the finance term.
Option to purchase fee
A voluntary payment (normally a nominal amount) at the end of some finance agreements (such as hire purchase) which, if paid, transfers ownership of the car from the finance company to the customer.
Personal Contract Purchase
Personal Contract Purchase (PCP) is a form of hire purchase agreement, which includes a voluntary "balloon" payment at the end of the term. This final amount represents the forecasted future value of the car, based on the age of the vehicle at the end of the agreement and the forecasted mileage.
Monthly repayments are generally lower under a PCP agreement than a comparable Hire Purchase agreement because of this deferred amount.
With this type of agreement, the balloon payment is optional. It must be paid if you wish to own the car outright, but you could simply decide to hand the keys back (subject to condition) and start a new finance agreement for a different vehicle.
This is the length of time over which you agree to repay the amount of finance you have borrowed.
This means that the interest rate can go up or down depending on the Bank of England's interest rate during the term of your finance agreement. This type of finance agreement is more common in the mortgage market.