The Ultimate Guide to Understanding Car Financing Terms

Buying a car is a huge financial decision, with many choosing to get behind the wheel with car finance deals. 

Navigating the world of car loans can be a complex one. With so much industry-specific jargon to get your head around, we’re here to help. 

This guide breaks down the most common finance terms, helping you feel more confident and prepared as you explore car financing options. Whether you’re new to this payment type or looking to brush up on your knowledge, this guide has you covered. 

What Is Car Financing?

Car finance is the process of borrowing money to purchase a car. It involves paying back the total amount in monthly instalments over an agreed length of time. 

The most common types are hire purchase (HP) and personal contract purchase (PCP), which can be used to buy a new or used car. 

Key Car Financing Terms Explained

When looking into car finance, you’re likely to be met with some new terms. Here are the most common ones you’ll come across: 

• APR (Annual Percentage Rate): The APR is the interest rate you’ll pay over the term of the loan, and is important for comparing financing options.
• Deposit: Sometimes, a deposit is required at the start of the financing agreement, bringing monthly payments down. However, with added interest, it doesn’t mean the overall loan will be lower. 
• Monthly payment: Monthly payments are calculated based on the loan term, APR, and deposit size.
• Term length: The length of the financing agreement, which typically ranges from 24 to 60 months.
• Credit score: Depending on the provider, credit score can affect eligibility and APR terms. 
• Balloon payment (PCP): A balloon payment in relation to Personal Contract Purchase (PCP) agreements is needed if the customer wants to own the car outright at the end of the term.
• Early repayment fees: It’s common for potential fees for paying off the loan early to appear, often impacting a buyer’s ability to pay off the loan ahead of schedule.
• Depreciation: The value of a car depreciates over time and can affect the terms of financing agreements like PCP.

Hire Purchase (HP) vs. Personal Contract Purchase (PCP)

HP and PCP are pretty similar car financing types, but the main difference between HP and PCP is what happens at the end of the agreement. 

HP involves splitting the cost of the car into equal payments across the term length, and at the end, the car is automatically yours. 

PCP, on the other hand, offers lower monthly payments, with an optional final payment to own the car. 

How to Choose the Right Car Financing Option

Car finance isn’t a one-size-fits-all solution, and what is right for you might be a no-go for another driver. 

The best way to figure out which option is right for you is to speak to an expert. 

The team here at Concept Car Credit includes professional car lenders who are closely in touch with some of the best finance brokers in the area. So, if you have any questions about which route to take, our team is on hand to answer your questions – just get in touch today!