Car Finance Jargon Buster

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Car finance can be a complex world filled with confusing terms and jargon that can leave you scratching your head. From APR to balloon payments, understanding car finance’s various terms and acronyms is essential for making informed decisions.

In this blog post, we’ll unravel the mystery behind car finance jargon and provide a comprehensive guide to understanding the language of car financing. So, let’s dive in and make sense of the car finance maze!

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z


Administration Fee

Charged at the start of the finance agreement, this fee covers the lender’s administrative cost. Such as setting up the finance and issuing relevant documentation.

Agreement Term

The agreed period of time in which you have agreed to repay the finance.

Amount of Credit

This is the full amount that you are borrowing, excluding any fees.

Annual Mileage

The mileage a car on finance is allowed to drive each year.

For certain finance deals, such as Personal Contact Purchase (PCP), your estimated mileage is important, as you will be charged extra at the end of the agreement if you have gone over the set annual mileage restrictions. Annual mileage doesn’t apply to all finance deals, such as Hire Purchase (HP).

APR (Annual Percentage Rate)

It is the total cost of borrowing, expressed as a yearly interest rate. It includes the interest rate and any additional fees and charges associated with the loan. The APR helps you compare different loan offers and understand the overall cost of financing your car.

Approved In Principle

The lender has assessed your car finance application and tentatively agreed to provide the loan, pending verification of the information you provided. It’s not a final approval, but a conditional acceptance subject to further checks.

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The amount that you intend to finance. The price of the car you are buying minus the upfront deposit that you are putting down. During the finance agreement it refers to the amount left that you have to pay.

Balloon Payment

A large lump sum payment due at the end of certain financing agreements, such as Personal Contract Purchase (PCP). It allows you to have lower monthly payments throughout the loan term. Still, you’ll need to make the final large payment to own the vehicle fully or consider refinancing the remaining balance. This figure is worked out and agreed at the start of the agreement.

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Capital Balance

Refers to the outstanding amount of the loan you still owe to the lender. It represents the remaining principal amount that you need to repay over the loan term.

Consumer Credit Directive (CCD)

This is an EU directive designed to ensure transparency and high levels of customer protection when buying on credit.

Cooling-Off Period

As a consumer, you have a period of 14 days to reject and withdraw from any finance agreement under the Consumer Credit Directive,

Credit Score

Your credit score is based on your past credit history and existing debt and will help lenders decide what rate to offer you. You can read up more on What Is a Credit Score.

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This is the initial payment you put down towards the car at the start of the finance agreement. The larger your deposit, the lower your monthly payments, and the more likely you’ll be accepted.


Refers to the decrease in the value of your car over time. It is a natural and inevitable occurrence that affects all vehicles. Understanding the rate of depreciation is important because it can impact the resale value of your car and potentially affect your loan or lease agreement.

Documentation Fee

Not all agreements have a documentation fee, but sometimes there’s a fee to process the paperwork for your car finance agreement.

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Early Settlement

Paying off the outstanding loan amount before the agreed-upon term ends. This can be done to clear the debt sooner or to take advantage of potential cost savings on interest.


Equity represents the difference between the current market value of your car and the amount you owe on your car loan.

You have positive equity if the market value is higher than the loan balance. Positive equity can be beneficial when trading in or selling your vehicle because it can be applied as a down payment toward a new car.

Negative equity occurs when the amount you owe on your car loan is higher than the vehicle’s current market value. This situation can arise if the car’s value depreciates rapidly or you financed the vehicle with a small down payment. Negative equity can complicate the process of selling or trading in your vehicle.

Excess Mileage

The additional miles you drive beyond the agreed-upon mileage limit in a lease agreement. This can result in extra charges or penalties at the end of the lease term.

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This refers to the Financial Conduct Authority who are an independent body that regulates financial services in the UK.

Fixed-Rate Interest

The term is used to describe an Interest Rate that remains the same throughout your contract.

Flat Rate

This is the rate of interest that is charged for taking out finance. With flat rate interest, the rate will stay the same for the duration of the car finance agreement. 

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GAP Insurance

GAP insurance, also known as Guaranteed Asset Protection insurance, is an optional coverage that helps cover the difference (or gap) between the amount you owe on your car loan and the actual cash value of your vehicle in case of theft or total loss. It provides financial protection and ensures you’re not left with a significant loan balance to repay.

Guaranteed Future Value (GFV)

This represents the estimated value of your car at the end of the finance agreement, taking into account fair wear and tear. Your car could fall below the guaranteed future value if your car has been in an accident or had any major issues.


Someone who agrees take on the debt if you can’t longer keep up with the repayments on your finance agreement. A guarantor is usually required for specialist or guarantor loans, loans for younger people or those with minimal or no credit history. This is usually a parent or close relative.

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Hire Purchase (HP)

A popular choice of car finance if you are looking to own the car at the end of the finance agreement. It involves an upfront deposit and equal monthly instalments. Read our post on What is Hire Purchase Car Finance for more information.

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Regular and scheduled payments made to repay the loan for the vehicle. These payments are typically made monthly and include both the principal amount borrowed and any applicable interest charges.

Interest Rate

Percentage of the loan amount that you will pay as an additional charge to the lender. It is the cost of borrowing money and is applied to the outstanding loan balance over the loan term.

Invoice Price

The amount that the dealer paid to the manufacturer for the vehicle. It is the cost basis for the car before any markups or dealer fees are added. Knowing the invoice price can help you negotiate a fair purchase price.

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Joint Application

A finance application taken out by two or more people. This can sometime be the case if two people combine there affordability in order to get a higher priced car. It is also common if the owners will both be sharing use of the car and want to have joint ownership. Together, they are responsible for repaying the loan or finance agreement.

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Late Charge

Fee imposed by the lender when the borrower fails to make the scheduled loan payment by the due date. It is a penalty for late payment and is added to the outstanding balance.


Leasing is a contract-based arrangement where the lessee (borrower) pays a monthly fee to use a vehicle owned by the lessor (leasing company) for a specified period. At the end of the lease term, the lessee can return the car or potentially buy it, depending on the lease terms.

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Max Lend

The maximum amount of money that a lender is willing to provide as a loan to finance the purchase of a car. It represents the upper limit of the loan amount available to the borrower based on their creditworthiness and the value of the vehicle being financed.

Mileage Allowance

Maximum number of miles you are allowed to drive a leased vehicle without incurring additional charges or penalties. It is typically specified in lease agreements to protect the car’s value and account for wear and tear.

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Negative Equity

Negative equity occurs when the amount you owe on your car loan is higher than the vehicle’s current market value. This situation can arise if the car’s value depreciates rapidly or you financed the vehicle with a small down payment. Negative equity can complicate the process of selling or trading in your vehicle.

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On-road Price

The total purchase price of a car to enable it to be legally driven away. It includes the full purchase price, and usually takes into account the first registration fee (if the car is new), the cost of delivering it to your dealer, and your first payment of Vehicle Excise Duty (or road tax).

Option To Purchase Fee (OTP)

This is a charge imposed by some lenders at the end of a car lease. It is a fee paid by you if you decide to exercise your option to purchase the leased vehicle at the end of the lease term. This fee is typically a fixed amount and is outlined in the lease agreement. You can choose to pay the fee and buy the car, or you can return the vehicle to the leasing company.

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Part Exchange

Part exchange (sometimes referred to as PX) is when you trade in your current car and put the proceeds towards the purchase of your new vehicle.

Personal Contract Purchase (PCP)

A Car finance option that offers flexibility by providing lower monthly payments. It achieves this by deferring a significant portion of the car’s value to the end of the agreement, known as a balloon payment. Read our post on What is PCP Car Finance for more information.

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Refinancing involves paying off your current car loan with a new one, typically for a lower interest rate and decrease monthly payments.  This new loan can be with the same lender or a different one, and someone usually takes it out to save money or make the debt more manageable.

Read our post on How To Refinance a Car for more information.

Representative APR

It is a standardised way of representing the interest rate and other associated costs of a car finance offer over the course of one year. The representative APR takes into account not only the interest charged on the loan but also any additional fees or charges that the borrower may incur.

It is called “representative” because it is the rate that the lender uses to showcase the typical APR offered to a majority of customers who qualify for the financing. However, it’s essential to note that individual APRs may vary based on the borrower’s creditworthiness and other factors. The representative APR provides a helpful way for consumers to compare different car finance offers from various lenders to understand the overall cost of borrowing.

Residual value

This refers to the resale value of your car at the end of the agreement. The estimated residual value of your vehicle is calculated by the lender at the start of the agreement and is a key factor in determining the cost of your Monthly Payments.

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Soft Search

A credit search which doesn’t leave a trace on your credit file. It’s used to give finance companies an indication of risk and to decide how much they can offer you.

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This is simply the length of time you will agree to pay off your finance agreement.

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Variable Rate

Unlike a fixed rate, a variable rate will change based on fluctuations in the market.

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A contract between the manufacturer or dealer and the car owner, providing coverage for certain repairs or replacements of parts for a specified period or mileage limit. It aims to protect the owner from financial burdens related to unexpected mechanical failures or defects during the warranty period.

Wear And Tear

The normal deterioration or damage that occurs to a vehicle over time due to regular use. It includes minor damages and cosmetic issues that can be expected as a result of driving the car. Wear and tear is distinct from damages caused by accidents or neglect.


Also known as a total loss, occurs when a vehicle is damaged or involved in an accident to the extent that it is deemed uneconomical or unsafe to repair by the insurance company. In such cases, the cost of repairing the car exceeds its current market value or a predetermined threshold set by the insurance company.

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Get in touch if there are any terms that you think we have missed. We would be more than happy to help you through the confusing world of car finance. | 01522 420 420

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