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Finance Glossary

Finance terms can be confusing when choosing the right finance option for you and if you don't understand the finance terms, the loan could cost you more than you expected! Below is some common terms used when arranging car finance and loans to help you understand what they mean and avoid unexpected additions to your loan.

This list of definitions should help you to understand the car finance jargon and see you to getting an affordable car loan for your dream car.

0% Interest

This is a deal where you pay no interest on a loan.

APR - Annual Percentage Rate

This is a standard method of calculating how much a loan will cost you over the full period of the loan. The APR reflects the total charge for credit. This is not the flat rate.

Balloon Payment

If you choose to use PCP as your finance option when buying a used car, you can defer part of the loan to the end of the agreement - a balloon payment. You can either pay this amount off and the car is yours or you can give the car back to the motor finance company.

Cost to Change

This is the cost of how much it would be to change your car. This is calculated by the difference between the value of your existing car and the price of the replacement car.

Credit Agreement

This is a contract between you and the lender, this could be a motor finance company or a bank for instance. They guarantee to give you a loan or a car and you agree to make the required payments at the relevant time.

Contract Hire

This is leasing a vehicle for a fixed period of time at a fixed monthly rental.

Depreciation

This is an indication of how much your car loses value over a period of time.

Equity

This is the difference between the value of your car and what you have left to pay on the loan

Fixed Rate

If the interest rate charged and/or the monthly payments are fixed throughout the full term of the loan, then the rate is called a fixed rate.

Gap Insurance

You are still liable for a loan if a car is written-off. Normal insurance only pays for the value of the car at the time of the accident or theft, which may be less than the amount outstanding on the loan. Gap Insurance covers the 'gap' between what the insurance pays out and what remains of the loan.

Hire Purchase (HP)

Please see our dedicated section on Hire Purchase as a finance option.

This is similar to a hire purchase offering. The finance option will offer a flexible deposit, flexible repayment periods and a flexible percentage of the purchase price can be deferred to the end of the agreement.

Minimum Guaranteed Future Value (MGFV)

If you arrange your car finance using the PCP method, you defer a percentage of the total cost of the car to the end of the contract. This percentage is known as the Minimum Guaranteed Future Value (MGFV). The MGFV plus your deposit is subtracted from the selling price of the vehicle and your monthly payments are based on the balance (plus interest on the balance and MGFV). At the end of the agreement you can opt to make a balloon payment to keep the car based on the MGFV.

Negative Equity

If your car is worth less than the amount you have left to pay on your loan.

Option to purchase fee

If you arrange your car finance using the PCP method and want to keep the car, you may need to pay an additional charge to pay the car.

Part Exchange

You can exchange your existing car as part payment for your new car. Please see our dedicated section on part exchange and selling your car.

Personal Contract Purchase (PCP)

Please see our dedicated section on PCP as a finance option.

Residual Value

This is the value of your used car taking into account depreciation, condition and mileage.

For more information about the right finance option for you, please watch our Hendy Finance video or contact us for more information.

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