Personal Finance Jargon Buster

Understanding and applying for personal car finance comes with many different confusing terms. Use this as a guide to get you started.

Administration Fee
Also known as an acceptance fee, an administration fee is normally charged at the start of the finance agreement. You’ll pay the administration fee to lenders to cover their admin costs, like setting up finance, registering the deal on the system and issuing or digitising the relevant documentation. Administration fees are common on both PCP and PCH deals.

Annual Mileage
Your annual mileage limit is the number of miles you can drive each year without incurring any excess mileage charges. If your finance agreement has an annual mileage limit, you’ll have to estimate your annual mileage in your initial agreement. Be aware that you’ll be charged extra, normally at a rate of a few pence per mile, if you go over the agreed limit.

APR
The Annual Percentage Rate (APR) is another name for the interest rate. APR takes into account interest charges and other fees you must pay to as part of your finance agreement. APR is a useful way to compare the cost of different finance deals.

Equity
Once you have paid all debts on your car, it will become an asset you own and known as equity. You can have positive equity or negative equity. Negative equity is when the car is worth less than the amount still owed. For example, the car is worth £10,000 but your settlement figure is £12,000 – this would give you a negative equity of £2,000.

GFV
Guaranteed Future Value (GFV) is what the car will be worth at the end of your contract/finance term. As part of your agreement, the finance company will predict the car’s GFV based on estimated mileage, the length of your agreement and the make and model of the car. They will then guarantee your car’s minimum value once your contract has expired. This may also be known as the Guaranteed Minimum Future Vehicle (GMFV).

Hire Purchase
Hire Purchase (HP) is a finance deal that normally consists of a deposit followed by fixed monthly payments. Under hire purchase, you don’t own the car until you’ve fully repaid the debt.

Personal Contract Purchase
With Personal Contract Purchase (PCP), you’ll make monthly repayments after an initial deposit. You’ll only own the car if you choose to make a balloon payment at the end of the contract.

Personal Contract Hire
Your monthly rentals are based on the difference between the initial value of the vehicle and its projected residual value at the end of your agreement. Therefore, only a proportion of the vehicle’s value is repaid, which keeps monthly payments lower.

Term Length
Another name for the agreement term, this is the length of time you’ll be paying your finance agreement.

Total Repayable
This is the total amount you’ll repay the lender over the course of your finance agreement. It will include the loan itself, plus the total cost of credit, interest and fees.