Car Finance A-Z

Financing a car is an excellent method of payment for many vehicle buyers, allowing them to get behind the wheel of a car they love without having to fork out the full amount all at once. However, the confusing jargon surrounding car finance can be enough to put anyone off, which is why we have decided to provide a much-needed explanation of some of the most significant terms you might need to be aware of before making a finance application. Here is our A-Z guide to car finance.

APR 

APR stands for Annual Percentage Rate, which is the amount it costs in total to borrow money for a year. This is not only inclusive of the interest rate offered by car finance providers, but also additional fees that they may require you to pay as part of the agreement. It is mandatory for lenders to display the APR on all quotes and contracts. When you are buying a car on finance, you should compare providers by looking at the cost of the vehicle and the APR to find out how much you will pay in total with each lender and this way, it will be easy to see who is offering the best deal.

Balloon Payment 

This is associated with personal contract purchase (PCP) finance. At the end of a PCP contract, the borrower will be given the option to either return the vehicle to the dealer, or keep the car. If they choose to become the owner of the car, a final payment will be required and due to this last instalment being such a substantial sum of money, it is known as a balloon payment.

Credit Score/Rating 

Your credit rating or credit score will give finance lenders an idea of how reliable you are as a borrower - generally speaking, the higher your score, the more likely you are to be successful in an application for car finance and the lower the rate of interest offered will be. Your rating is determined by your credit file, which is a record of your previous loans and credit applications and assets. If your credit score is low, this does not necessarily mean that you will be refused finance, in fact, Smile specialises in helping individuals with bad credit to secure a fair deal.

Depreciation

Depreciation refers to a car’s loss of value due to age, mileage and wear and tear.

Equity

Equity is the gap between the value of your car and the amount you owe your finance provider. Equity can be positive or negative. Positive equity is when your car is worth more than what you owe, whereas negative equity means that you owe more than the value of your car.

Fixed Rate

The term ‘fixed rate’ applies to interest. If you have a fixed rate of interest, this means that it will not fluctuate throughout your contract term and your monthly payments will always remain the same.

Guaranteed Minimum Future Value

At the start of a PCP finance arrangement, the provider will predict the minimum amount your car will be worth when your contract ends based on the length of the contract term and the mileage you estimate you will use - this is known as the Guaranteed Minimum Future Value (GMFV). The GMFV will be used to determine the cost of your monthly payments, in addition to the optional balloon payment.

Hire Purchase

Hire purchase is a type of finance whereby you will borrow the amount needed to buy a vehicle from a provider, who you will pay back over an agreed period of time in monthly instalments at a fixed rate of interest. When the contract finishes and you have repaid the cost of the car along with the interest, you will be the owner of the vehicle.

Mileage Cap

A mileage allowance is set at the beginning of finance agreement that may lead to the finance company taking back the vehicle when it ends to be resold. These caps are set because more mileage results in the depreciation of a vehicle, meaning it will not sell for such a high price. If you have exceeded your mileage cap, you are likely to be charged a penalty when you return the vehicle, so keep an eye on those miles you rack up!

Personal Contract Purchase

Personal contract purchase is a type of finance agreement similar to hire purchase. However, you will only pay for a vehicle’s depreciation, based on a GMFV set by the finance provider, rather than its total cost, which means that the monthly instalments will be lower. Another way in which PCP differs from HP is that you will not automatically become the owner of the car when your contract term ends, you will be given the option of either returning it or making a balloon payment to keep it.

Zero Deposit- Zero deposit or no deposit car finance is exactly what it sounds like. With most types of finance, before you start making monthly repayments, you will have to first put down a deposit on the vehicle, but zero deposit agreements allow you to get a car on finance without making an initial payment - you will begin paying the monthly instalments straight away. We provide car finance deals which require no deposit at Smile.
 

Of course, this is just an overview of the most essential terms, but if you wish to find out more about a specific aspect of car finance, speak to the experts! Get in touch via phone or email, or better yet, visit Smile Car Finance in person at our site in Tredegar, Gwent.