Finance explained simply
Taking out your first finance agreement can seem like a massive decision, especially when you feel out of your depth with all the jargon and options available.
Pershore Motor Group have made this simple for you with this list of all the key facts, jargon and info you could possibly need the next time you are buying your car so you are ready to go!
How Finance Works:
- Borrow the amount you need.
- Pay in monthly instalments.
- Depending on the price plan at the end of your agreement you will either own the car outright in your own name or you can pay a final balance.
Benefits of Arranging Finance with Pershore Motor Group:
- Access to over 30 major banks and finance providers which means we can find the best option for your budget.
- Over 90% of our applicants are accepted.
- We offer a 0% deposit option so no part-exchange or deposit is required
- Finance packages available for 18 year olds upwards
- We can arrange finance plans for terms of up to 7 years
- Cashback offers are available with certain providers
Annual Percentage Rate (APR):
The APR is the interest charged per year on your loan. This includes fees and allows you to quickly compare costs of loans with similar clauses.
Balanced Financed:
This is the amount you will have left to pay for the car once your deposit and any part-exchange amount is subtracted.
Balloon Payment/Optional Final Payment:
The lump sum payment that finalises your finance agreement, meaning you’ll own the car after this. You may or may not have to pay this, depending on the type of car finance you take out.
Hire Purchase (HP):
This is the most common form of finance which means you are guaranteed to own the car at the end. You will usually pay a regular amount for a fixed term agreed with the finance company.
Personal Contract Purchase (PCP):
This is ideal for people who want lower payments and prefer to change cars on a regular basis. This type of lease is a variation of a HP agreement with lower monthly payment and a final ‘balloon payment’. The difference here is that the payment is optional and you can choose to continue with a new car instead of paying this and keeping the car. Repayment amounts are usually lower on PCP agreements.
Finance Lease
Ideal for VAT-registered businesses and companies where the vehicle remains the property of the finance company with the vehicle effectively hired out to a business. A finance lease is different to a hire purchase as there is a large payment at the end (see balloon payment). This agreement usually has lower repayment amounts and the final payment figure will be determined by the age of the car and estimated mileage. At the end of the finance lease agreement the vehicle is sold to a third party by the finance company, if the sold price is above the pre-determined balloon payment the finance company will refund a percentage of the proceeds back to the hiring company or business. If however the sale price is lower than the balloon payment then the hiring company will have to settle the difference back to the finance company.
Conditional Sale:
In this type of sale, the customer will own the car automatically at the end of the lease term, providing they adhere to all conditions e.g. paying all payments and fees.
Credit Agreement:
This is a legally-binding contract between you and the finance company. It will include all information regarding the lease such as term time, amount of the loan and any charges
Depreciation
This is how much value your car has lost since purchasing it from new. How quickly your car will lose value and how much value it will lose is dependent on several factors including condition of the car, make and model, mileage etc. Some cars depreciate much quicker than others.
Equity
This is calculated by working out the difference between the market value (what the car is worth if you were to sell it) and how much of the loan is left to pay. For example, if a car is worth £20,000 and you have £10,000 left to pay, there is £10,000 of equity. Negative equity is when the loan amount is more than the car value. This might happen if the car has depreciated more than its market value due to excess mileage, damage to the condition to the car or market for that make and model.
Fixed Rate Interest:
This interest rate will not alter for the duration of the loan which gives you a level of certainty when considering your repayments.
GAP Insurance
Guaranteed Asset Protection insurance can cover the difference between the car value and the amount left to pay. Insurers will usually only pay the car’s market value if you are in a crash. This insurance covers the rest.
Guaranteed Minimum Future Value (GMFV)
This is used in certain types of car finance such as Personal Contract Purchase (PCP) to determine the value of the car at the end of the lease term. Mileage and term length are usually considered when working this out.
Interest Rate:
Finance companies charge an ongoing fee when you borrow from them. This charge will apply throughout the loan term and can sometimes vary depending on your credit rating.
Joint Application
Put simply a joint application is where two or more people will apply for one loan together. It may be a good idea to apply as a joint application if you have a poor credit history as this may help your chances of finance being accepted. Not all car financiers will offer this.
Part-Exchange:
This is when you trade your old car in to use as partial payment towards a new car.
Residual Value:
At the end of your finance agreement, the amount the car is worth is called the residual value. Sometimes this will be agreed at the start of the loan but sometimes it will be calculated using factors such as mileage, age and resale appeal.
We hope this list helps you when it comes to financing your next car, any questions please feel free to drop us a call.