Glossary of car finance terms

  • All the terms and definitions to do with car finance
  • From balloon payment through to payment protection
  • Help to make your buying process as easy as possible

Finance can sound like gobbledegook so to ease the pain here's some terms you might hear at the car dealership:

  • APR (annual percentage rate) - Use this figure to compare the value of agreements. It is the cost of a loan as a yearly rate over its full term. Remember to translate that percentage rate into cash terms so you know exactly how much interest you are paying.


  • Balloon Payment - A deferred lump sum, payable at the end of the payment term. Taking this option means monthly payments are greatly reduced. Found in PCP and hire purchase agreements.


  • Credit agreement - The contract between the borrower and lender. You get the car, and agree to pay for it over a set period of time.


  • Credit rating/credit history/credit record - This is information held by institutions as a record of your financial dealings. It has details of current loans, loans you've had previously and how you've managed finances in the past. You will be scored based on this information, and financial organisations will use the score to decide if you should get credit, and if so, how much to give you. It can also be used to determine APR rates for a credit agreement.


  • Depreciation - The amount your car has decreased in value over the time you've owned it, because of mileage, wear-and-tear and ageing.


  • Equity - The positive difference between the value of your car and the amount outstanding on the finance used to buy it.


  • Flat rate - The monthly interest rate charged on the amount borrowed over the term. Does not include any reductions as you pay the loan off, so is not an accurate way of comparing loans. Do not confuse with APR.


  • Fixed rate - The rate of interest will remain the same right through the credit agreement, regardless of what happens to base rates.


  • GAP (guaranteed asset protection) insurance - Covers you against any shortfall in payment should you write your car off or have it stolen while still paying for finance.


  • Minimum guaranteed future value (MGFV) - This is the very lowest amount your car is guaranteed to be worth at the end of your finance agreement. In PCPs, this is the amount (minus your deposit) that you pay as the balloon payment at the end of the term.


  • Negative equity - Owing more on the finance agreement than the value of your car.


  • Part exchange - When you use your existing car as part-payment for a new one.


  • Payment protection - Insurance cover that pays your finance for you if you are ill, injured or unemployed.


  • Residual value - the amount your used car is worth after wear-and-tear, mileage and general car condition is taken into account.