Car finance jargon explained!

Getting a car on finance can be a minefield of jargon and confusing terms; at CDG we’ve taken the stress out of buying a car and compiled a glossary of terms so that you can see the wood for the trees…

car finance jargon explained

Don’t sign on the dotted line until you’ve got the facts…

Confused about something we’ve not listed? Let us know in the comments box and we’ll add it to our list!


This is the contract between the lender (the finance company) and the borrower (you). It sets out the schedule of payments for the loan along with the interest, fees and charges and your responsibilities and rights. The agreement is legally binding so don’t sign it unless you agree to be bound by all the terms and conditions, and make sure you have checked that all the figures are the same as the ones quoted to you.

Amount of credit

This is the amount you are borrowing, not to be confused with the Total Amount Payable, which is the amount you have to pay back and includes interest and fees.

APR (Annual Percentage Rate)

Required by the government; the APR allows you to compare different finance offers to understand the total cost of borrowing. The APR is an overall figure which shows the annual cost of borrowing the money, including all the interest and scheduled fees payable as part of the agreement.


This means ‘behind’; car finance repayments are usually taken in arrears, i.e. the month after you have acquired the car. If you find your account ‘in arrears’ it means that you have missed payments and will need to make extra payments to get you back on track with your agreement.


Although charge and fee often mean the same thing, in some contracts a charge is a specific type of fee actioned by your agreement; for example failing to make a payment on time could see you being charged.


See agreement.

Contract hire

With contract hire, you do not own the car, it remains the property of the finance company and at the end of your agreement the car goes back to them. This is a long-term rental agreement or lease and it’s not too dissimilar from renting a car for a day or week. This type of loan is popular with businesses; prices quotes may not include VAT so check before signing.

Credit rating / credit score

This is an assessment of your suitability to borrow money; banks and finance companies use credit agencies to assess your credit score and approve or deny a credit request depending on the result.


This is an up-front or initial payment towards the cost of the vehicle.


Cars depreciate in value depending on VAT, wear and tear, mileage and the age of the car, the depreciation is the amount of money your car loses.

Early settlement

Selling your car or paying off your finance before the end of the agreement is called early settlement. This saves you money overall as you pay less interest, although there may be a fee to pay for doing this.


The difference between what your car is worth and what you still owe – equity means your car is worth more than what you owe. Negative equity means that you owe more than the car is worth, so you will need to pay off the shortfall should you wish to sell or part-exchange the car.

Fair wear and tear

If the car is going back to the finance company it is fair for them to expect the car to be in good condition. Cars suffer general wear and tear when driven, so a certain level of wear and tear is expected, but if there is further damage this will need to be paid for. Be prepared to argue your case as it is difficult to define what is acceptable wear and tear.


Nearly all finance agreements include fees, these are paid as a lump sum at the start of the loan and/or at the end. Penalty fees may also apply, if you exceed your mileage allowance, fail to keep up repayments or want to settle the agreement early.


The Financial Conduct Authority is an independent body responsible for regulating all consumer credit agreements in the UK.

Gap insurance

GAP insurance covers you for the difference between the car insurance pay out and either the finance settlement or the original invoice price of the car should your car be written off or stolen. The estimated value of the car might be less than what you paid for it, and this tops up the difference.

GFV (Guaranteed Future Value)

If you take out a PCP (see below) the finance company guarantees a minimum value for the vehicle at the end of the agreement, based on the length of the contract and the total mileage to be covered, as long as the car is in good condition and has a full service history. If these conditions can’t be met then the company is not obliged to pay you the GFV.


If you don’t meet the finance company’s lending requirements, or have a poor credit score, the company can ask for a guarantor; this is a third party who signs a legally binding contract committing them to make the payments should you be unable to.

HP (Hire Purchase)

Hire purchase is a straightforward finance agreement where the interest rate is fixed for the full term, and the payments are spread equally until the Total Amount Payable is repaid. As the finance is secured against the car, you don’t take ownership of the car until you have fully repaid the loan.


A scheduled, regular monthly payment.


The money payable on top of the amount borrowed. This is usually spread over the entire term of the loan; part of every monthly payment will be interest.

Interest rate / flat rate

This is the percentage that you pay the finance company on top of the amount you are borrowing and is different from APR which also includes fees.

Invoice price

The price of the car, including VAT but not including on-road costs such as road tax and delivery charges.


See Contract Hire.


Lease agreements can offer you the chance to include your servicing costs in the finance; this may not save you any money but will allow you to spread the cost of your maintenance over the term of the loan.

Mileage allowance

If you choose an agreement that sees the finance company taking back the car at the end of the term, will be calculated based on the end value of the car, one of the factors being mileage. At the start of the agreement you nominate the annual mileage you expect to cover to calculate the total mileage allowance.  If you exceed this mileage allowance, you will be charged a fee.

Negative equity

Negative equity means that you owe more on the finance agreement than the car is worth, so you will need to pay off the shortfall should you wish to sell or part-exchange the car.

On-road price

The total cost of the vehicle, including on-road costs like road tax, number plates and any delivery costs.

Option to purchase fee

The balance that is outstanding at the end of the agreement, you have to pay this to settle the agreement and own the car outright.

Overpayment / additional payment

Some finance plans allow you to make extra payments on top of your regular monthly payments, reducing your Total Amount Payable and either shorten the term of the loan or reduce your monthly payment amounts. Some companies charge for this so make sure you check before going ahead.

PPI (Payment Protection Insurance)

This is an insurance product that covers your monthly payments should you find yourself unable to make them; make sure it is suitable for you before taking it out.

PCH (Personal Contract Hire)

As with Contract Hire, but designed for individuals rather than companies.

PCP (Personal Contract Purchase)

PCP’s are the most popular way to finance your car in the UK. Similar to a Hire Purchase, but the PCP only requires you to repay the depreciation of the vehicle, not the full cost. At the end of the agreement you can either pay what remains, sell the car (provided you have paid the option to purchase fee) or give the car back to the finance company.

Pre-contract /pre-credit contract information

A summary of the main points of a finance agreement; make sure you have a thorough read of this.


The dealer must give you a complete breakdown on an official written quotation from the finance company, all car finance offers must be available in writing, and provide all relevant information clearly in a format regulated by the FCA. The quote should specify how long it is valid for, this is usually 14 days.

Residual value

The value of a used car at a particular point in its life, taking into account its age, mileage and condition. Finance companies need to be able to predict the value of a car at the end of the agreement, for whatever term and mileage your contract states.

Secured / unsecured loan

A secured loan means that the car remains the property of the finance company throughout the agreement, until the loan is settled in full. If you stop making payments it could result in your car being repossessed.

An unsecured loan means that you own the car upfront so the finance company cannot seize your car but they can affect your credit rating and force you into bankruptcy.


A payment to cover all outstanding money owed and end the agreement.


The repayment period, usually expressed in months on a finance agreement.

Total amount payable

The total cost of the vehicle, including your deposit, the amount of credit, interest and all scheduled fees.

VT (Voluntary Termination)

Sometimes referred to as halves; once you have repaid half of the Total Amount Payable on an HP or a PCP, you are entitled to return the car without any further payments. You must have had a perfect payment history and the car must be in good condition

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