Glossary

A

Acceptance Fee

An additional charge – usually to cover the costs of administration - that is sometimes made by the lender (finance company) and is in addition to the interest charged to the customer.

Accessories

Items added to a vehicle, e.g. a tow-bar, roof rack etc.

Administration Fee

An additional charge – usually to cover the costs of administration - that is sometimes made by the lender (finance company) and is in addition to the interest charged to the customer.

Advance

The amount of finance that is loaned to a customer. This is the invoice price of a vehicle, minus any deposit. Interest is charged on the advance.

Agreement

The document that legally binds a customer, following an application to obtain goods on credit or hire. The customer (or hirer) and lender (or owner) must sign an agreement for it to be legally binding.

Amortise

Simply means ‘to pay’. A fully amortising loan has no balloon or residual value, it is often known as full-payout.

Annual Percentage Rate (APR) - Officially defined as `That rate at which the amount of credit advanced is equal to the sum of the present values of each repayment of capital and of each payment in respect of the total charge for credit`.

An APR is the total percentage rate of interest that is charged against the advance/amount of finance borrowed by a customer. The APR includes the flat/fixed interest rate charged by the lender, plus any other administration fees or charges incorporated into the agreement.APRs were introduced as a means to give the customer the chance to compare the cost of one finance facility with another on a fair basis.

APRs were introduced as a means to give the customer the chance to compare the cost of one finance facility with another on a fair basis.

Arrangement Fee

An additional charge – usually to cover the cost of setting up a finance facility - that is sometimes made by the lender (finance company). It is in addition to the interest charged to the customer.

Asset

Any item of value that is owned by an individual or company. Motor finance can be referred to asset-backed lending because the vehicle is provided to the customer alongside the supply of finance.  

B

Balance

The remaining amount of finance that is due to be paid by the customer to the lender under a finance agreement or the difference between the total amount of credit and total amount of debit in an account.  The balance changes with every transaction/payment.

Balance Financed

The total invoice price less deposit paid – see Advance.

Balloon Payment

Under certain agreements (e.g. Hire Purchase) the consumer can negotiate a larger, single payment (also referred to as a lump sum) at the end of the agreement to reduce the cost of regular payments. This is known as a Balloon Payment. See Finance Structures section.

Base Rate

The published rate of interest offered by a financial institution. Also known as a flat rate of interest. The Bank Base Rate is issued by the Bank of England. The Finance House Base Rate (FHBR) is issued by the Finance & Leasing Association and represents the cost to finance companies of borrowing funding to lend to customers.

Business Manager

The person in a motor dealership that is generally responsible for handling the sale of Finance and Insurance (F&I) products.

C

Capital

Simply the amount of finance that is borrowed and due to be repaid. Capital exludes any interest charged and must be repaid immediately or by instalments.

Certificate of SAF Competence

Specialist Automotive Finance (SAF) has been introduced by the Finance & Leasing Association (see FLA). The Certificate of SAF Competence is clear recognition to consumers which dealership staff have attained the professional standard on motor finance set by the SAF Competence Test (online testing).

Charges

Generally the term ‘charges’ refers to the interest charged by the lender to the customer for providing finance, although it can also mean other charges such as arrangement fees including in agreements.

Compliance

A measure to decide if the customer/lender/dealer is acting in accordance to their obligations or acceptable standards. Regulatory compliance refers to systems or departments at businesses and public agencies that ensure that personnel are aware of and take steps to comply with relevant laws and regulations that affect the way in which they operate.

Conditional Sale

A type of purchase agreement where title/ownership to the associated goods (for example, a vehicle) passes from the finance company to the customer once all payments have been made.

Contract

A legally binding agreement between two or more persons for the purchase of financial products.

Contract Hire (or Operating Lease)

This is a method of funding the use but not the ownership of a vehicle, the customer (Lessee) is renting the vehicle for a fixed rental from a leasing company (Lessor) for an agreed period. At the end of the contract the vehicle is handed back to the leasing company. A Contract Hire lease transfers substantially all the Risks and Rewards of ownership to the Lessor and is an `Off-Balance Sheet’ method of funding.

Credit Protection Insurance (CPI)

An insurance policy to pay the customers finance in the event of personal circumstances changing. (Death, sickness, accident, redundancy etc.) – see PPI

Credit Reference Agency

An organisation that collects stores and provides information about credit customers’ past and current credit history. Main agencies are: Equifax, Experian, Infolink and HPI

Credit Sale

An agreement for the sale of goods which allows the customer to pay all or part of the cost of the goods in instalments. It differs from Hire Purchase and Conditional Sale in that the title (ownership) passes to the customer at the start of the contract.

D

Data Protection Act (DPA)

The Data Protection Act is an Act of Parliament intended to protect the privacy of the individual person and regulate the use of personal data by laying down eight legally enforceable Data Protection Principals. Any business that processes personal information must notify the Information Commissioner (previously called Data Protection Commissioner) and comply with all sections of the Act.

Debtor

The customer, company or individual entering into the agreement to borrow money from a lender or a person who has an obligation of paying a debt

Deposit

An initial payment of a portion of the capital cost of the vehicle. This usually takes the form of cash / cheque or equity in a part exchange vehicle

Distance Selling

The sale of goods or services to consumers via the telephone, fax, mail-order and increasingly by the internet or a digital TV is protected by Consumer Contracts Regulations – there are certain exceptions (for example, goods ordered from a public payphone) but the regulations do apply to motorvehicles

Documentation Fee

An additional charge that is sometimes made by the lender and is in addition to the interest

E

Early Settlement

Payment of the balance owing on a credit agreement, including interest, before the final payment is due. If it is a Regulated agreement under the Consumer Credit Act, there is a legally specified rebate that the customer must be given.

End of Agreement / Contract

When all the contracted payments have been made (including any fees) on an agreement. For Hire Purchase and Conditional Sale agreements, this is when title is transferred to the customer

Equity

The `positive` difference between the value of a vehicle and any money owed on that vehicle

Executed Agreement

When a contract (document) containing all the written terms of an agreement is signed by all the people involved in it – customer and finance company. This is when the contract is live.

Extras

See Accessories.

F

Finance & Leasing Association (FLA)

The FLA is the main representative body for the UK motor finance industry and its Lending Code sets out standards of good practice for the finance and leasing industry. Full FLA membership requires compliance to the Lending Code

Finance Contract

A document that details all the terms and conditions of a financial arrangement as well as vehicle and customer details.

Finance Lease

This is a method of funding the use but not the ownership of a vehicle. The customer (Lessee) is renting the vehicle for a fixed rental from a leasing company (Lessor) for an agreed period.

In this type of lease, the customer is responsible for the whole cost of the asset to the leasing company and will share in any profit when the asset is sold. The `Risk and Reward` are with the Lessee

Fixed rate of Interest

A rate of interest which cannot be altered during the term of a financial transaction

Flat Rate of Interest

A `flat` interest rate is the most common method used to calculate interest charges payable on a finance agreement . It is normally on a per annum basis and the total interest is calculated on the amount of money borrowed and the term of the loan.

Interest is charged on the full amount of a loan throughout its entire term. The flat rate takes no account of the fact that periodic repayments, which include both interest and capital, gradually reduce the amount owed. See also Fixed Rate of Interest

FLA Finance House Base Rate

The underlying base rate of interest that reflects the cost for lenders of borrowing money from the marketplace. This is calculated each month by the Finance & Leasing Association.

G

Guaranteed Asset Protection (GAP)

An insurance policy that bridges the gap between the insurance company payout and finance company settlement (or original vehicle cost) in the event of total loss or theft of the vehicle

Guarantee

A form of security used in support of a finance agreement where a third party acts as surety in the transaction between the finance company and customer

Guaranteed Minimum Future Value (GMFV)

This is set by the manufacturer or finance company and allows the customer to know the least amount the car will be worth at a point in the future. It is normally the guaranteed maximum balloon payment, or Optional Final Payment a customer would need to make in order to gain title to a vehicle on a Personal Contract Purchase (PCP). The GMFV is calculated after taking into consideration the retail price of the vehicle, the length of time the customer wants to keep the vehicle and the mileage they will cover during that time.

H

Hire Purchase

A Hire Purchase Agreement is a fixed cost, fixed period loan of money to purchase goods. It is a `Tri-Partite` agreement where a  finance company HIRES the vehicle to the customer for an agreed period at an agreed monthly sum; the customer can gain ownership (title) by paying an additional sum called the Option to Purchase Fee or Purchase Fee.

Hirer

The person to whom goods are hired under a hire agreement

I

Instalments

Amounts payable at regular intervals under a credit agreement - same as Rentals and Payments

Interest

An amount of money payable to the lender in addition to the amount of capital borrowed. This reflects the cost of money, the term over which it is lent and the risk involved - See Charges. It can be either a Fixed or Variable rate of Interest.

 
Invoice

A document that details vehicle and purchaser information as well as the price paid.

L

Lease

A contract between a Lessor and a Lessee for the hire of a specific asset where the title to the goods is retained by the finance company

Lease Purchase

A Lease Purchase is a purchase agreement (similar to a Hire Purchase or Conditional Sale). The term `Lease Purchase` was introduced into the finance industry to describe a Hire Purchase or Conditional Sale contract with a payment structure similar to a lease.  I.e. Instead of a deposit, `Advance Payments` may be paid and it is usual to have a balloon payment.

Lending Code

The FLA's Lending Code sets out the key commitments and principles which members are expected to follow at all times

Lessee

The user of leased goods (Customer)

Lessor

The owner of leased goods (Finance House / Bank / Leasing Company).

 
Liability

A customer’s obligations under a credit or hire agreement

 
Loan

A sum of borrowed money that is generally repaid with interest.

M

Money Laundering

This is the criminal process of changing the identity of illegally obtained money so that it appears to have originated from a legitimate `clean` source. Finance companies and dealers have a duty to be alert to possible money laundering and an obligation to report suspicious activities to the Financial Services Authority (FSA) and the Office of Fair Trading (OFT).

Mortgages

A way of using the value of property or land as security for a loan. Normally it is considered to be the loan itself. See Second Mortgage / Loan.

N

Negative Equity

The `negative` difference between the actual value of a vehicle and money owed on that vehicle.

 
Non-Regulated Agreement

A credit or hire agreement that is not governed by the Consumer Credit Act.

O

Operating Lease

This is a method of funding the use but not the ownership of a vehicle. The customer (Lessee) is renting the vehicle for a fixed rental from a leasing company (Lessor) for an agreed period. At the end of the contract the vehicle is handed back to the leasing company. An Operating Lease transfers substantially all the Risks and Rewards of ownership to the Lessor and is an `Off-Balance Sheet `method of funding.

 
Option to Purchase Fee

The fee that is only applicable on a Hire Purchase Agreement (usually payable with the final payment) that officially transfers title from the finance company to the customer.

 
Overdraft

A banking facility that allows an account to be operated, up to an agreed limit, when no credit funds are in that account.

P

Part Exchange

The process when a customer exchanges their car with a motor dealer to form part or all of a deposit towards the price of their next new vehicle

 
Payment Holiday

A period during the agreement when the customer does not make any payments

 
Payment Protection Insurance (PPI)

Also known as Payment Protection Plan (PPP), is an insurance policy to pay the customers finance in the event of personal circumstances changing. (Death, sickness, accident, redundancy etc.) – see CPI.

 
Personal Contract Purchase (PCP)

A PCP is in essence a Purchase agreement (similar to a Hire Purchase or Conditional Sale) that is governed by vehicle mileage and term, where a predicted minimum value (GMFV) is offset until the end of the agreement. At the end of the agreement the customer has three options:

1.   Part exchange for another car

2.   Pay the final payment and keep the car

3.   Return the car and walk away

Personal Loans

A loan of money to purchase any item the customer wants – including vehicles. The facility is widely offered by Banks, Building Societies, Direct Lenders and Finance Companies.

 
Primary Period of Hire

The initial period of a lease. On a Contract Hire agreement the vehicle is due to be returned at the end of the Primary Period of Hire.

R

Rebate (Early Settlement)

A sum of money returned to a customer following the early payment of a finance agreement. For agreements regulated by the Consumer Credit Act, the minimum amount of rebate is legally specified.

 
Regulated Agreement

An agreement regulated by the CCA.

 
Rentals

The term used for instalments or payments especially in leasing.

 
Repossession

The taking back of goods by the owner which are the subject of a credit or consumer hire agreement usually because instalments or rental payments have not been kept up-to-date.

Repossession Rights - Detailed under the CCA as the `thirds rule`. The rights of a customer and finance house when goods can be repossessed in the event of default.

Once a consumer has paid more than one third of the Total Amount Payable, the goods are classed as protected and cannot be repossessed without a court order or the customer's informed consent. In Scotland a Court Order is always required.

Residual Value

The value of goods at a point in the future – normally the end of a finance agreement. It is only a predicted figure at the start of the agreement.

S

SAF Competence Test

The SAF Competence Test is an annual online test aimed at all customer-facing staff in motor dealerships. The online test consists of 40 challenging multiple-choice questions and must be completed in 40 minutes. The system is simple to operate and will help dealerships more effectively manage finance-related issues.

 
SAF Training Material

The SAF Reference Material is available to all motor dealerships that do not have access to alternative motor finance training to assist them in taking the SAF Competence Test. Staff may visit the material as often as they like to help complete the test

 
Second Mortgage / Secured Loan

A loan is secured on property or land, regardless of the purpose of the loan. It can take the form of:

•    Mortgage

•    Second Mortgage

•    Secured Loan.

It is usually for borrowings in excess of £25,000 and is provided by banks, building societies and specialist lenders. They are structured over a longer period of time (5 – 25 years), linked to the amount of equity in a customer’s house and based on a variable rate of interest (some lenders will do interim periods at a fixed rate).

Secondary Period of Hire

The period after the end of the Primary Period on a Finance Lease, where the lease is extended. Rentals in this period are usually at a much-reduced rate – sometimes termed `peppercorn rentals`

Security

Security is the guarantee of a suitable financial return on investment e.g. property that will be pledged as collateral for a loan. In any form of lending, the lender is seeking to recover his capital outlay plus interest. Anything less may be regarded as a loss.

Service Contract

A specially tailored service contract can be included in finance packages to cater for service, repair and maintenance costs of a vehicle.

Settlement

The finalizing of a financial transaction.

 
Settlement Penalty

An amount charged to customers who settle an agreement early. Any customer has a statutory right to complete payments under an agreement early, if they so desire. When this happens, the customer is entitled to a rebate of the outstanding interest if the agreement is regulated under the Consumer Credit Act. The Finance Company, however, is allowed to charge a penalty to compensate for breaking the contract earlier than anticipated – this is currently one months penalty interest.

 
Specialist Automotive Finance (SAF)

SAF is a kitemark developed by the FLA to raise standards and improve skills for those involved in the sale of motor finance. SAF will improve consumer confidence and change consumer awareness of showroom finance.

 
Spread Rentals

This refers to a payment profile for a contract. The capital and interest is being paid for `spread` over the whole period (as opposed to having a `terminal pause`).

 
Supplier

The invoicing dealership.

T

Terminal pause

This refers to a payment profile for a contract or agreement, i.e. 3+33.  A Terminal Pause is the time between the date of the last payment and the end of the initial agreement period which in the 3+33 example could be month 36. The capital and interest is therefore being paid over a shorter period and the customer has no payments to make during the final months.

 
Termination

The ending of certain types of credit agreement according to the terms and conditions of the individual agreement

 
Termination Rights

Detailed under the Consumer Credit Act as the `halves rule`. The legal rights of the customer to end an agreement and return the goods.

The CCA allows the consumer to terminate the agreement before the end of the contractual term. Termination is not the same as settlement, because title to the goods does not pass to the customer

Title

Legal ownership of a vehicle.

 
Total Amount Payable

The total amount a customer pays for goods including all charges and fees.

 
Trade In

A vehicle offered as part payment in respect of the purchase of another vehicle. See also Part Exchange

 
Tri-partite` agreement

An agreement which has three parties involved in the transaction: Customer; Dealer; Finance Company.

U

Unregulated Agreement

Another term for an agreement not covered by the CCA

V

V5 (Registration Certificate)

A document provided by the Driver and Vehicle Licensing Agency (DVLA) that details: vehicle; specification and Registered keeper details (name and address).

 
Value Added Tax (VAT)

Is a general tax on goods and services which was introduced into the UK in 1973 and is policed by Her Majesty’s Revenue & Customs (HMRC – used to be Customs & Excise) The National HMRC VAT Advice Service can be contacted on 0845 010 9000.

Each EU country has its own rates of VAT. In the UK there are three rates:

•    Standard rate - currently 20 per cent.

•    Reduced rate - In some cases, for example children’s car seats and domestic fuel or power – there is a reduced rate of 5%.

•    Zero rate - There are some goods on which VAT is not levied, for example; food, books, newspapers and magazines, children’s clothes.

Variable Rate of Interest

Rate of Interest charged that changes in response to movements in the base rate of interest used. This Rate of Interest is also known as `base rate` linked, but unlike `fixed rate`, it may change during the life of an agreement in line with current market conditions. This means it could go up – costing the customer more; or go down – costing the customer less.

Vehicle Identification Number (VIN)

A unique number that is attached to vehicles in order for them to be identified.

 

W

Wear & Tear

The deterioration in vehicle condition (and value) due to ordinary and normal use.