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.
Glossary
A
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
Process whereby the initial cost of an asset is written off over a period. A fully amortising loan is therefore fully paid off at the end of the loan period - there is no balloon payment of residual value. It is also 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.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 Sheet
A statement provided by a business or organisation in their annual company accounts which sets out its assets, liabilities and capital at a particular point in time. A balance sheet essentially provides a snapshot of what the company owns and owes.
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.
Broker
Sometimes known as Secondary Brokers. They differ from primary brokers (motor dealerships) by acting as a more traditional broker (eg a mortgage broker). A car finance broker will contact several lenders to get the several potential deals for the customer organise the finance on their behalf.
Business Manager
The person in a motor dealership who is generally responsible for handling the sale of Finance and Insurance (F&I) products.
C
Cancellable Agreement
A finance agreement that is regulated by the Consumer Credit Act, but one that is signed off `Trade Premises’. This gives the customer the right to cancel (in writing) a finance agreement within a specific number of days of signing it. The cancellation terms are shown in the agreement. See Distance Selling section.
Capital
Simply the amount of finance that is borrowed and due to be repaid. Capital exludes any interest charged and can be repaid in a lump sum or by instalments.
Certificate of SAF Expert Competence
Specialist Automotive Finance (SAF) has been introduced by the Finance & Leasing Association (see FLA). The Certificate of SAF Expert competence is clear recognition to customers which dealership staff have attained the professional standard on motor finance set by the SAF Expert 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 included in agreements.
Compliance
A measure to decide if the customer/lender/dealer is acting in accordance with their obligations or acceptable standards. Regulatory compliance refers to systems or departments at businesses and public agencies that ensure that staff 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 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 customers’ past and current credit history. Main agencies are: Callcredit, Equifax and Experian.
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 Principles. Any business that processes personal information must notify the Information Commissioner (previously called Data Protection Registrar) 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 to pay 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.
Discretionary Commission
Incentive schemes provided by finance providers that give dealer and broker staff the discretion to change the total cost of finance payable by the customer. Typically this would allow the dealer or broker to change the interest rate or APR within a set range. The FCA estimated that discretionary commission models led to £300m of additional interest costs paid by consumers in 2017/18.
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 motor vehicles
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 the agreement is regulated under the Consumer Credit Act, there is a legally specified rebate that the customer must be given.
Economic Growth
An increase in the amount of goods and services produced in the economy over a period of time.
Electronic Identification and Verification (EID&V)
The use of electronic systems to verify the customer’s identity. The information provided by the customer such as personal details, biometric data, forms of ID and responses to questions is verified against a number of databases to check the customer is who they say they are.
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
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.
F
Finance & Leasing Association (FLA)
The FLA is the 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 with 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 amount from a leasing company (Lessor) for an agreed period.
With this type of lease, the customer is responsible to the leasing company for the whole cost of the asset 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
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 guarantees to make the repayments owed to the finance company by the customer in the vent that the customer is unable to make them.
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.
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 degree of risk to the lender involved - see Charges. The rate of interest can be either Fixed or Variable.
L
Lease
A contract between a Lessor and a Lessee for the hire of a specific asset (vehicle) where the title to the asset 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. 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
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 National Crime Agency.
Mortgages
A legal process whereby the value of property or land is used as a security for a loan. Where it is used for property purchase, the term is commonly used as meaning the loan itself. See Second Mortgage / Loan.
N
Non-discretionary Expenditure
priority payments needed to meet debts and other essential living expenses. Non-discretionary expenditure is therefore a consumer’s core monthly expenditure that finance companies must establish or estimate to ensure the credit being applied for is affordable (unless it is obvious that the credit is affordable).;
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 Protection Insurance (PPI)
Also known as Payment Protection Plan (PPP), PPI is an insurance policy intended to pay the customers contractual payments 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 consumer item – 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.
Prudential Regulation Authority
Part of the Bank of England that is responsible for ensuring firms are being run in a safe and sound way. The PRA is the regulator for banks, building societies, credit unions and investment firms, making sure they hold sufficient funds and have adequate risk controls in place to protect their customers, themselves and the UK economy. The PRA works closely with the FCA.
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.
Repossession
The taking back by the owner of goods 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 - The rights of a customer and finance provider relating to 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. This is detailed under the CCA as the 'thirds rule'.
Residual Value
The value of goods at a point in the future – normally the end of a finance agreement. It can generally only be predicted at the start of the agreement, since the exact figure will be unknown at that point.
S
SAF Expert 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 60 challenging multiple-choice questions and must be completed in 60 minutes. The system is simple to operate and will help dealerships manage finance-related issues more effectively.
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 Expert 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`
Secured Finance Agreement
An agreement where the lender owns the vehicle throughout the term and has the right to repossess it if the customer does not meet repayments. Hire Purchase, Conditional Sale and Personal Contract Purchase are types of secured finance agreements.
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 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`).
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
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 involving three parties, for example a customer; dealer and a finance company.
U
Unsecured Finance Agreement
An agreement where the customer owns the vehicle (or any other asset) as soon as they take possession of it. The lender therefore has no right to repossess the vehicle if the customer fails to repay the loan. Personal loans and Credit Sale are types of unsecured finance agreement.
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)
A general tax on goods and services which was introduced into the UK in 1973. The National HMRC VAT Advice Helpline can be contacted on 0300 200 3701.
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
A rate of Interest charged that changes in response to movements in - generally - the Bank of England's base rate. A variable rate may also 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.