Car Finance Glossary
Clear, plain-English definitions for terms related to car loans, PCP, and vehicle leasing.
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Acceptance Fee
A one-off administration charge levied by some car finance lenders when they approve and set up your finance agreement. This fee is sometimes added to the total amount financed, meaning you pay interest on it over the term of the agreement.
Balloon Payment
A large lump sum payment due at the end of a Personal Contract Purchase (PCP) agreement. The balloon payment, also known as the Guaranteed Minimum Future Value (GMFV), represents the predicted residual value of the car. You can pay it to own the car outright, return the car, or use any equity as a deposit on a new deal.
Conditional Sale (CS)
A type of car finance where you pay fixed monthly instalments over an agreed term, at the end of which you automatically own the vehicle. Unlike PCP, there is no large balloon payment and no option to return the car — ownership transfers to you once all payments are made.
Dealer Finance
Car finance arranged directly through the dealership rather than independently. While convenient, dealer finance is not always the most competitive option. Dealers often earn commission on finance products, so it is worth comparing independent lenders before accepting a dealer's offer.
Deposit
An upfront payment made at the start of a car finance agreement, which reduces the amount you need to borrow. A larger deposit typically results in lower monthly payments and may help you access better interest rates.
Deposit Contribution
A cash incentive offered by a manufacturer or dealer that acts as a contribution towards your deposit on a new car. Deposit contributions effectively reduce the amount you need to finance and can make PCP deals appear more attractive.
Early Settlement
Paying off your car finance agreement before the end of the agreed term. Under the Consumer Credit Act, you have the right to settle early, and the lender must provide a settlement figure. An early repayment charge may apply.
Equity
The difference between the current market value of your car and the amount you still owe on your finance agreement. Positive equity means your car is worth more than you owe; negative equity means you owe more than the car is worth.
Excess Mileage Charge
A fee charged at the end of a PCP or PCH agreement if you have driven more miles than agreed in your contract. Excess mileage charges are typically calculated per mile (e.g. 6–10p per mile) and can add up to a significant sum.
Finance Agreement
The legally binding contract between you and the lender setting out the terms of your car finance, including the amount borrowed, interest rate, monthly payment, term length, and any conditions such as annual mileage limits.
Guaranteed Minimum Future Value (GMFV)
The minimum value the lender guarantees your car will be worth at the end of a PCP agreement. This figure forms the basis of the balloon payment. If the car's actual market value falls below the GMFV, the lender absorbs the loss — not you.
Hire Purchase (HP)
A car finance product where you pay a deposit followed by fixed monthly instalments. You do not own the car until the final payment is made. HP typically has no mileage restrictions and no large balloon payment, making it straightforward but often resulting in higher monthly payments than PCP.
Interest Rate
The annual cost of borrowing expressed as a percentage of the loan amount. Car finance interest rates vary significantly depending on your credit score, the lender, the type of finance, and the age of the vehicle. Always compare the APR rather than the flat rate.
Negative Equity
When you owe more on your car finance than the vehicle is currently worth. This is common in the early stages of a PCP agreement when depreciation is fastest. Negative equity can cause problems if you want to change your car before the agreement ends.
Part Exchange
Trading in your existing vehicle as part of the payment for a new car. The dealer values your current car and deducts that amount from the price of the new vehicle. If you have outstanding finance on your current car, the settlement figure must be cleared first.
Personal Contract Hire (PCH)
A long-term car rental agreement where you pay fixed monthly instalments to use a vehicle for an agreed period and mileage. At the end of the contract, you return the car with no option to purchase. PCH is also known as personal leasing.
Personal Contract Purchase (PCP)
The most popular form of car finance in the UK. You pay a deposit, followed by lower monthly instalments (compared to HP) calculated on the depreciation of the car rather than its full value. At the end of the term, you choose to pay the balloon payment to own the car, return it, or use any equity as a deposit on a new deal.
Representative APR
The Annual Percentage Rate that at least 51% of successful applicants will receive. Because car finance is risk-based, your actual APR may be higher if your credit score is lower. Always check the rate you are personally offered rather than relying on the advertised representative APR.
Residual Value
The predicted market value of a car at the end of a finance agreement. Residual value is a key factor in calculating PCP monthly payments — cars with higher residual values result in lower monthly payments because less depreciation needs to be financed.
Settlement Figure
The total amount required to pay off your car finance agreement in full at a given point in time. This includes any outstanding capital, accrued interest, and any early repayment charges. You are entitled to request a settlement figure from your lender at any time.
Voluntary Termination
Your legal right under the Consumer Credit Act to end a HP or PCP agreement early once you have paid at least 50% of the total amount payable. You return the car and owe nothing further, provided the vehicle is in reasonable condition and within the agreed mileage.
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