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Car Finance and Loan Glossary: Understanding The Jargon
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Car Finance and Loan Glossary: Understanding The Jargon

Searching for car finance and lost in a maze of technical terms? You’re not alone. Financial jargon and unfamiliar words can make the whole process feel bewildering. Here at Hippo, we want to make getting car finance easier for you, so we’ve put together an ...
Fahad Hussain
July 2021
Car Finance and Loan Glossary: Understanding The Jargon

Searching for car finance and lost in a maze of technical terms? You’re not alone. Financial jargon and unfamiliar words can make the whole process feel bewildering.

Here at Hippo, we want to make getting car finance easier for you, so we’ve put together an A to Z of all the terms you might come across when looking to take out car finance. Meaning when the time comes, you feel prepared. 


Administration fee

Also known as an application or arrangement fee, this is a one-off sum the borrower may have to pay at the start of their finance agreement for the loan to be arranged.

Agreement term

The length of time over which you agree to repay the car finance loan.

Annual mileage

This refers to the mileage limit for some forms of car finance that is set out in the finance agreement. 

The estimated mileage is important, as you could be charged an excess mileage fee at the end of the contract should you exceed it.


If you miss a payment on your vehicle finance, the overdue amount is known as arrears. 

Balloon payment

The balloon payment, also known as the Guaranteed (Minimum) Future Value,  is the lump sum that is deferred to the end of some car finance agreements, such as personal contract purchase (PCP). When the agreement comes to an end, subject to the terms, you have the option to pay the balloon payment to buy the car outright.

Benefit in Kind (BIK)

A car tax contribution for business users who have a company car that they use for private usage as well.


An individual or company that can access a range of lenders to help find a suitable car finance loan for you. 

Conditional sale agreement

A type of finance agreement that allows you to spread the cost of a vehicle over a fixed repayment period at the end of which, if you have met the terms of the contract, you automatically own the vehicle.

Consumer Credit Act (CCA)

The Consumer Credit Act 1974 is a government act designed to protect consumers and sets out the content of agreements between the individual and finance providers.

Cooling off period

Under the Consumer Credit Act, you should have 14 days to withdraw from a credit or loan agreement without penalty. This is known as the cooling off period.

Credit report

Also known as credit history, this is a record of a person’s financial borrowing and shows whether you’ve made repayments on time and in full, as well as your financial status.

Credit rating/Credit score

This is the rating system that measures a person’s creditworthiness based on their credit history. The higher the score, the more chance you have of being accepted for a loan or securing the most competitive interest rate. 

Credit reference agency

A company that compiles a person’s credit history based on information supplied to them by financial institutions. The main three in the UK are Experian, Equifax and TransUnion. Their purpose is to assist lenders in getting access to your credit history and rating.

Credit search

A search performed by a lender or broker to check the credit score of the applicant with a credit reference agency and see if they meet the eligibility criteria for the loan.


The initial payment put down at the start of the finance agreement. The deposit is deducted from the total amount of the loan.

Deposit contribution

A deposit offered by a car dealership or manufacturer to reduce the amount you need to finance.


The reduction in the value of the vehicle over time. This is affected by age, mileage and wear and tear.


Equity is the difference between the agreed market value of the car and the amount of the loan remaining on it.

Early repayment charge

Also known as an early settlement fee, this is a one-off sum you may be required to pay if you want to pay off the loan before the end of the contract.

Final payment

Also known as the option to purchase fee, this is the final payment made under some car finance contracts in order to legally own the vehicle.

Finance agreement

An agreement between the individual and the finance company that sets out the terms of the loan, such as monthly payments, cancellation fees and what happens at the end of the contract.

Financial Conduct Authority (FCA)

The body responsible for regulating all financial services within the UK, ensuring the safety of consumers.

Fixed interest rate

A set rate of interest that is guaranteed not to change at any time throughout the period of the loan.

Flat rate

The base rate of interest charged on the loan per year as a percentage of the amount borrowed. The flat rate will not take into account any other charges.

GAP insurance

GAP insurance or Guaranteed Asset Protection is a form of insurance designed to pay the difference between the current market value of the car and how much is left on the loan in the event of an accident and write off.

Guaranteed Minimum Future Value (GFV)

The Guaranteed (Minimum) Future Value is what the car is estimated to be worth at the end of the finance agreement. Also known as the balloon payment, as this is the amount the borrower will pay in order to own the car at the end of a PCP deal.


A third party person such as a family member or friend who guarantees the loan, making the repayments when the applicant is for any reason unable to do so.

Hire purchase agreement (HP)

A type of car finance that allows you to own the vehicle at the end of your contract following fixed monthly repayments over an agreed period of time. 


The amount charged to borrow money, which is generally added to the loan.

Joint application

An application for car finance alongside another person, using both your details to support the application.

Lease purchase (LP)

A type of car finance loan which comes with a mandatory final repayment to own the vehicle at the end of the contract following fixed monthly repayments and an optional deposit. 


A finance company, group or individual that loans money to a borrower for various reasons. In this case, car finance.

Lending criteria

The lending criteria are the key requirements that lenders look at to determine whether to lend to you, such as income, credit score and age.


Lease agreements can offer the option to include the vehicle’s servicing (maintenance) costs in the monthly payments, saving you from paying for these costs separately. 

Monthly repayments

The amount of money required to be paid every month by the borrower to the lender to pay off the loan.

Negative equity

When the vehicle’s value is less than the outstanding amount owed

Option to purchase

A one-off voluntary final payment that will transfer the ownership of the vehicle from the lender to the customer.

Part exchange

Part exchange involves trading in your old car to use as a contribution towards the cost of the new car’s value.

Personal contract hire (PCH)

A long-term rental (or lease) where you make fixed monthly payments for a pre-agreed period in return for a car of your choice. At the end of the term, you hand the vehicle back and can start a new contract.

Personal contract purchase (PCP)

A form of car finance through which you can pay for the car in monthly instalments over a fixed period of time. At the end of the contract, you can choose to hand the car back, use any equity in the car to put down as a deposit on a new car, or pay the vehicle’s GFV to own the car.

Personal loan

One way to finance a car, a personal loan allows you to borrow a fixed amount of money over an agreed term through a financial institution such as a bank. The money can then be used to purchase a vehicle.


The estimated cost of a loan. The actual cost of your loan could be different to the quote depending on a number of factors including the time elapsed since you received the quote.  

Repayment holiday

A repayment holiday allows the borrower to postpone their repayments for an agreed amount of time, with the cost of the missed payments spread across the time left on the agreement.

Residual value

The value of the car at the end of the finance agreement is known as the residual value.

Secured loan

A secured loan uses the vehicle to secure the debt for the safety of repayment. This means the lender can take the vehicle back should the borrower fall into arrears or fail to meet the terms of the contract.

Soft search

A pre-approved check to determine your potential eligibility as a borrower. A soft search does not show up on your credit report and will therefore not affect your score.

Standard Variable Rate (SVR)

When the interest rate can vary across the term due to changes in the base rate, thus affecting your interest payments.


The agreed length of time a borrower has to repay the loan according to the finance agreement.

Total Amount Repayable

This is the total amount the borrower is required to repay – the value of the loan, final repayment, any additional fees and interest.


The process of assessing the loan application, assessing risk and determining eligibility in order to accept or refuse credit given to the applicant.

Unsecured loan

A loan not secured against the vehicle. These types of loans typically have higher interest rates.

Voluntary surrender

When a borrower cannot afford to make their monthly repayments on a secured loan, voluntary surrender means they can agree to let the finance company take back the vehicle and sell it at auction to recoup the money. The borrower will then have to pay any remaining monies owed.

Voluntary termination

Applicable to HP or PCP agreements, once half of the Total Amount Payable has been paid, the borrower can return the car without any further payments, subject to terms and conditions.

If you are looking to find out more about how we can help to find and finance your next vehicle, then why not get in touch, or you can apply online now, with no impact to your credit score and a decision in minutes.

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