DATA shows that millions more people have started using car finance, but many are completely baffled by it.
Reports from the Finance and Leasing Association (FLA) show the value of the car finance market reached close to £4.3 billion in September, revealing more than a quarter of a million cars were financed in the UK during the month alone.
But research from Hippo Motor Finance also shows many people are confused by the jargon that comes with this type of finance, don’t understand the options, and think key terms mean other things entirely.
Tom Preston, UK car expert and Managing Director of Hippo Motor Finance, said: “There is a lot of jargon out there, which can feel overwhelming, complicated and difficult to get your head around.
“It’s like learning a new language for some people, especially those new to car finance. It’s important for people not to be afraid to ask a sales person, or whoever they are speaking to when discussing car finance options, questions about the terms they come across if they’re not clear on them.
“They need to make sure they fully understand an agreement they sign up to, know exactly how it works and what it involves, and if it’s right for them.”
Zopa reported last month that nearly half of consumers who purchased a car with finance didn’t know what type of deal they had signed up to. A key reasons was because of the jargon, with 19% saying they didn’t understand it and 16% saying they didn’t understand the finance options given to them.
Admiral also reported last year that just one in ten British people understand car finance jargon, with some believing certain abbreviations actually have nothing to do with car finance at all.
Many people have said they thought PCH was either a hallucinogenic drug or stood for personal car hire, for instance, while others presumed the term balloon payment was made up.
There are many confusing terms that people are likely to come across when looking into car finance and Leasing Brokers need to explain and demystify them.
APR – Standing for annual percentage rate, basically another name for the interest rate. It takes into account interest and other fees that you should pay as part of your finance agreement.
Balloon payment – This is the final and larger payment that’s due at the end of some finance agreements, which allows you to take ownership of your car.
HP – Standing for hire purchase, this is a type of car finance agreement where you pay a deposit and monthly instalments to become the legal owner of your vehicle.
GFV – This acronym stands for guaranteed future value, which is sometimes known as the guaranteed minimum future value (GMFV). It’s when a finance company guarantees what your car will be worth at the end of your agreement, regardless of its true depreciation.
GAP insurance – GAP stands for guaranteed asset protection and is a type of insurance that covers the difference between your car’s original costs and its value if it’s written off or stolen.
Part exchange – When you trade in your current car to contribute towards paying for a new one.
PCH – Personal contract hire, this is a type of long-term lease agreement. It involves you making monthly payments and returning the car at the end of the contract.
PCP – This stands for personal contract purchase. It is another type of finance agreement, which involves you making an initial deposit followed by monthly repayments.
VT – In the world of car finance, this stands for Voluntary Termination. It is the process by which the consumer has a right to terminate a regulated credit agreement, such as PCP, when they have paid off 50% of the total amount payable.