The Annual Percentage Rate (APR) is used to help you understand the annual cost of borrowing, and includes interest rate charges, and other fees in your agreement, such as administration and option to purchase fees. The APR must be shown, by law, on relevant customer documentation in showrooms, or that has been sent to them, so they can make an informed decision when comparing available finance products.
A balloon, or GMFV, payment is the lump sum deduction from the vehicle’s future residual price at the end of the agreement, that is based on the vehicle’s age and forecast mileage at the end of the contract. The debtor agrees to pay the balloon payment to the lender at the end of finance agreements, such as Personal Contract Purchase, Lease Purchase or similar, to complete it, if they choose to take ownership of the vehicle, rather than to hand the keys back and hire another vehicle. It is important to always check which type of agreement best serves your needs, including whether a balloon payment is expected under the agreement.
A credit agreement is a legally binding contract between the customer and the finance company, that is either signed in the showroom on printed documents, or signed electronically at home or work. It must include details of the loan amount, the term, rates of interest, other charges, and your rights and responsibilities for the duration of the agreement. You will receive a copy of the agreement you have entered, including the terms and conditions.
A credit rating/score is an evaluation undertaken by finance companies when they obtain credit information from bureaus, such as Experian, Equifax or Trans Union; it helps them decide the rate of interest to charge, based on the perceived risk of lending to you.
Having Fixed Rate monthly repayments means that the repayment amounts won’t change for the duration of the agreement; this is ideal for budgeting purposes.
Flat Rate interest is the agreed monthly or annual charge on the finance agreement, which: stays the same throughout the duration of the loan; and excludes other charges, such as any administration or option to purchase fees. However, it is prudent to always ask for the Annual Percentage Rate (APR), which more accurately describes the true cost of the finance.
GAP/RTI Insurance is an add-on type of protection that can help cover the difference between: the market value of the car, and the amount of outstanding finance under your credit agreement (GAP Insurance); or the original purchase price of the car (Return to Invoice GAP). It’s best to shop around for the most suitable GAP Insurance for your needs, as there are various types available on the market.
In agreements such as Personal Contract Purchase, the Guaranteed Minimum Future Value (GMFV) is the total cost of the vehicle, that is deferred until the end of the contract and paid as a ‘balloon’ payment. The finance company forecasts the GMFV at the beginning of the agreement, by considering the vehicle’s age, and the customer’s estimation of how many miles they expect to cover each year. It is important to be realistic with your estimates, as an excess mileage fee will be charged, if the agreed mileage is exceeded.
Hire Purchase (HP) is one of the most popular finance products available. An initial deposit is paid when taking out the agreement, then fixed monthly repayments are made over a set number of months for the duration of hiring the vehicle. The vehicle, therefore, is not legally owned by the customer, even though they are the ‘registered keeper’, until the final repayment, and any administration/option to purchase fees, have been paid.
The Option to Purchase fee is paid to transfer ownership of a vehicle from the finance company to the customer, at the end of finance agreements like Hire Purchase or Personal Contract Purchase.
Personal Contract Purchase (PCP) is a popular way to finance that new vehicle available to individuals, that generally has lower monthly repayments than a comparable HP agreement. The important things to consider with PCP are:
The term is the duration over which you agree to repay the amount of finance borrowed.
Unlike Fixed Rate, Variable Rates of interest can impact the overall cost of your loan, as the interest rate increases or decreases during the lifetime of your agreement, in line with the Bank of England’s base interest (or LIBOR) rate changes. It is, however, less likely that this type of finance agreement will be available in the vehicle finance marketplace, as it’s more common in the mortgage/secured loan markets.
