Car finance glossary

The key terms you need to understand when buying a car with finance

The world of car finance and loans can be a bit confusing, we know – if the terminology isn’t hard enough, there are acronyms, abbreviations and more.

Our glossary is here to help, whether you’re after a quick refresher or you’re completely new to car finance.

A

Acceptance fee

An acceptance fee covers a lender’s administration costs. Not all lenders charge a fee and those that do, some include it within the monthly payments, and some add it to the start of the finance agreement. Zuto doesn’t charge an acceptance fee.

APR – Annual Percentage Rate

APR stands for annual percentage rate and is the cost of borrowing money over a year expressed as a percentage. It is usually higher than the flat rate of interest because it considers other factors in the calculation such as acceptance fee, term, loan amount and credit score. The APR affects how much money you pay back on top of the loan amount.

B

Balloon payment

A balloon payment is a one-off lump sum paid at the end of your finance agreement to buy the car outright. The size of the balloon payment is decided at the start of your finance agreement and is specific to PCP car finance.

Battery lease

A battery lease scheme means that you rent the battery of your new electric car from the manufacturer. When buying a used car, even though you lease your battery, you can still finance or buy the vehicle.

Broker

Zuto are a credit broker which means we work with a large panel of lenders and dealerships to help you find the perfect car and finance deal. Zuto won't charge you anything for our service but we will receive a commission from the lender which varies based on the product, amount borrowed or your credit score. This doesn't affect the amount you pay.

C

Capital

Capital is wealth in the form of an asset, for example, a house or your savings. In a car finance agreement, your capital is held in your vehicle once the agreement is paid in full.

Car finance

Car finance is a credit agreement that enables a car to be bought over a period of time. The lender will provide a loan and the buyer will pay it back with monthly payments. The buyer only owns the car once they have made the final payment. There are different types of car finance available such as Hire Purchase (HP), Personal Contract Purchase (PCP), Conditional Sale and Lease Agreement.

Car lease

A car lease agreement means you hire the car and hand it back at the end of your agreed term. The car is not yours to own.

Car loan

A car loan is a financial agreement which is secured against the car you want to buy. Instead of having the money in your bank, you will have a car on the drive. It’s also known as car finance.

CCJ – County Court Judgement

A County Court Judgement is a court order to pay back an outstanding sum of money to a lender. It will appear on your credit history for six years so having one may make it difficult to be approved for car finance. Zuto might be able to help you with this.

Credit lender

A credit lender is an organisation that can provide you with a loan.

Credit score

A credit score is an overall rating of your ability to borrow money and pay it back. It can also be made up of voters roll history, associations, good and bad debt, types of debt and number of credit accounts, amount of credit searches completed and geographical location.

The higher the score, the more likely you can take out a loan or car finance. It is based on your credit history, which includes any debt you have and your repayment history. 

CRA

Consumer Rights Act 2015 is an Act of Parliament of the United Kingdom that consolidates existing consumer protection law legislation and also gives consumers a number of new rights and remedies.

CAIS

CAIS is the largest source of UK consumer credit commitments, with information on the vast majority of the UK's active credit population. It’s used to gather data from virtually every major lending organisation in the UK and collects over 490 million credit accounts a month.

D

Deposit

A deposit is a sum paid at the start of your financial agreement. The bigger the deposit against the amount that you are looking to finance will determine the loan to value (LTV) of the borrowing against the vehicle.  You can choose car finance which doesn’t require a deposit.

Depreciation

Depreciation is a decrease in the value of an asset over time. Most cars depreciate for various reasons, such as, but not limited to, age, a decreased demand, damage to the vehicle or increased mileage.

DMP – Debt Management Plan

A Debt Management Plan is an informal agreement between you and your lender, which can be managed by a DMP provider/company, for paying back your debt. When you’re in a DMP, you are still eligible to apply for finance. However, you will be advised to contact your Debt Management Firm or Debt Advisor to discuss the finance to ensure it is affordable.

E

Equity

Equity is the difference between the outstanding debt owed to the lender and the resale value of the car. You have positive equity if the value of the car is greater than the amount owed. Negative equity is when the amount of money owed to the creditors is greater than the resale value of the car.

F

FCA

The Financial Conduct Authority are the financial regulator in the UK. Zuto Limited is a credit broker, not a lender, and is authorised and regulated by the Financial Conduct Authority.

FOS

Financial Ombudsman Service - is a free and easy-to-use service that settles complaints between consumers and businesses that provide financial services.

G

Guarantor Loans

Being a guarantor involves helping someone else get credit, such as a loan or mortgage. Acting as a guarantor, you “guarantee” someone else's loan or mortgage by promising to repay the debt if they can't afford to. It's wise to only agree to being a guarantor for someone you know well.

Zuto does not currently offer guarantor finance but does consider joint applications. You will need to contact Zuto directly to apply for this.

H

Hard credit check

A hard credit check occurs when a company, or lender, carries out a detailed search of your credit history. It will appear on your credit report and reduce your credit score slightly.

HP – Hire Purchase

Hire Purchase (HP) is a type of car finance that enables you to hire the car while paying agreed monthly instalments. These repayments cover the cost of the car, plus interest. You do not own the vehicle until the last payment is made.

I

IVA – Individual Voluntary Agreement

An Individual Voluntary Agreement is an arrangement with your creditors to pay back all or part of your debts over time. Monthly payments will be given to a lawyer or accountant who will then distribute this to your creditors. Some lenders will provide finance whilst in an IVA, however written permission will be required by the IVA company.

J

Joint application

A joint application for car finance is made by two people who agree to share the responsibility of a finance agreement. Responsibility to pay is on both parties but only one direct debit from one account would come out, or if one person cannot pay, the other will liable. A joint application will combine two people’s credit scores, income and expenditure. As you cannot apply online for it, you will need to contact Zuto directly to apply.

K

kW – kilowatt

A kilowatt is a unit of measurement for electrical energy and is commonly used to show an electric car’s power. 1 kW is the same as 1.34 bhp.

M

MOT

An MOT is an annual inspection of a vehicle’s safety. Legally, all vehicles over three years old are required to have a valid MOT certificate to proves they are roadworthy. Read our MOT guide to know what to look for.

N

Negative equity

Negative equity is when the amount of money owed to the creditors is greater than the resale value of the car. If you settle your agreement early, you’ll need to pay the difference between your car’s resale value and the money you owe.

P

PA – Per Annum

Per Annum means per year. For car finance, you’ll often see it alongside interest rates or repayment figures. This is mostly used to describe mileage and APR.

PCP – Personal Contract Purchase

Personal Contract Purchase (PCP) is a type of car finance that lets you loan a new car. The loan is paid back in monthly instalments with an optional balloon payment at the end of your contract if you want to own the car outright. You can also return the car. PCP finance is most common for new cars, and HP finance is most common for used cars.

Personal loan

A personal loan is a sum of money lent to you by your bank or a lender. If you use it to purchase a car you will own the car outright.

R

Rate of interest

The rate of interest or interest rate is the amount a lender charges for providing you with a loan. It is expressed as a percentage of the total loan amount.

Representative APR

A representative APR can be different to the actual APR you might be offered when applying for car finance. When you see a representative APR advertised, this means that at least 51% of customers receive a rate that is the same as, or lower than, the representative APR.

Representative example

A representative example is used by finance companies to give you an idea on how much the finance will cost. At Zuto we use a representative example of borrowing £7,000 over 48 months with a representative APR of 19.9%. In this example, the amount payable would be £207 a month, with a total cost of credit of £2,920 and a total amount payable of £9,920.

S

Soft credit check

A soft credit check is when a company, or lender, carries out a search of your credit history. Although you will be able to see it on your credit report it will not be seen by lender or affect your credit score as it is not linked to an application.

U

ULEZ – Ultra Low Emission Zone

The Ultra Low Emission Zone covers most of Central London and is designated as an area for low vehicle emissions. Cars that don’t meet the ULEZ standards are charged a fee for entering this zone.

W

Warranty

A warranty is a written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary, within a specified period of time.

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