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Confusing Car Finance Jargon (Explained)

Are you confused by car finance terms?

A revealing article published by The Car Expert highlighted that the majority of car buyers across the UK experience high levels of confusion when it comes to finance products, and don't always understand car finance terms (jargon);

Despite over three-quarters of new car sales being financed through manufacturer and dealer finance agreements, it is disturbing how few people understand what they are signing up to.

The article references a survey by BMW Financial Services, which discovered that an astonishing 88% of men and 75% of women could not explain what PCP is (Personal Contract Purchase), and 28% of the 1,000 drivers surveyed couldn't explain any car finance terminology.

With car finance options such a popular alternative to buying a car, it's shocking just how many people don't understand these key terms.

The Top 5 Confusing Car Finance Terms (Explained)

Here at BestCarFinder, we want to make the car leasing process as simple as possible. So when the top 5 confusing motor finance terms were revealed, we decided we'd write an article with the specific aim to explain these terms:

1. PCH (Personal Contract Hire)

PCH stands for Personal Contract Hire, which is one of the most popular forms of car leasing.

PCH is a leasing contract offered to private individuals only (not businesses), and is considered a cheaper alternative to buying a car.

A contract agreement is made between the car lease provider (eg. BestCarFinder) and the individual who wants to lease the car. This agreement allows the individual to then lease (in essence, 'hire' or 'borrow') a car for an arranged period of time - usually between 2-5 years.

An initial payment is made, followed by fixed smaller monthly payments, which continue until the car lease contract is over. It is this 'spread the cost' factor which makes PCH a popular car finance choice.

At the end of a PCH agreement, there are two options; you can either extend the agreement with the existing car, or return the car to the provider and start a new agreement. In essence, PCH contracts allow individuals to drive a brand new car every 2-5 years, which is another attractive reason to lease rather than buy.

Get a PCH quote with BestCarFinder

Things you need to know about Personal Contract Hire:

  • Many car leasing offers come with additional benefits, such as road tax and/or car maintenance. Offers of this kind will vary between different providers.
  • A PCH contract will not make you the owner of a car. The car belongs to the leasing company, you just 'borrow' the car. Due to this you will not be able to take out third party car insurance; you'll need comprehensive.
  • Most PCH agreements include a fixed mileage limit. For example, a 12,000 mile agreement would mean you would incur additional charges if you were to drive more than 12,000 miles. Always calculate an honest estimate of your annual mileage, and choose an agreement that you can stick to.
  • Changes to the VAT rate will be reflected in your monthly payments.

2. GAP (Guaranteed Assest Protection) Insurance

GAP (Guaranteed Asset Protection) insurance is a type of insurance mainly used on new and leased cars, which is designed to protect drivers from the effects of car depreciation.

GAP insurance covers the difference between the current market value of your car, and the amount you originally paid for it - eliminating the risk that your car insurer won't pay out enough to pay off your finance in the event of a loss.

There are three types of GAP insurance:

  • Finance GAP insurance  - pays the finance company enough money to cover your debt if you need to make a claim.
  • Return-to-invoice (RTI) insurance  - pays the difference between the insurers claim settlement and what the owner originally paid for the car. This is only available to cars less than 7 years old.
  • New car (vehicle replacement) insurance  - designed to compensate for the rising cost of cars. With this type of insurance you will get your money back, plus some more. This is so you can replace your car for a new one of the same model and specification. This is available on new cars only.

For more detailed information about GAP insurance and advice, check out this guide from the Money Advice Service.

3. PCP (Personal Contract Purchase)

PCP stands for Personal Contract Purchase (also known as Personal Contract Plan), and is a type of car lease agreement that is similar to PCH (Personal Contract Hire). Again, this type of agreement is only offered to private individuals (not businesses).

With a PCP agreement, you lease (effectively, 'borrow') a car for a fixed time period (usually 2-4 years). Once this period is over, you are given the option to buy the car for an additional, final payment.

At the start of a PCP agreement, you pay initial deposit (usually 30% of the total price of the car), followed by smaller monthly payments. During this period you are only leasing ('borrowing') the car, you do not own it. Once this period is over, the total amount of payments made will roughly equal a third of the original cost of the car.

At this point, a PCP agreement will provide you with the option of buying and owning the car, for a final payment of the remaining value of the car. This final payment is calculated by the leasing/financing company based on its estimates of the future residual value of the vehicle (called theGMFV; read on for more detailed information).

However, if you do not want to do this you can either hand back the car to the provider you leased it from, or use the equity as a deposit for a new PCP agreement.

The main advantage of PCP agreements is the monthly cost, which is often lower than similar deals. This is because you don't borrow the full value of the car.

Get a PCP quote from BestCarFinder

Things you need to know about Personal Contract Purchase

  • Many car leasing offers come with additional benefits, such as road tax and/or car maintenance. Offers of this kind will vary between different providers.
  • Most PCP agreements include a fixed mileage limit. You will incur additional charges if you go over this limit.
  • You must have fully comprehensive car insurance.
  • During a PCP agreement, you arenotthe owner of the car. The leasing company remains the owner of the car unless you decided to make the final payment and buy the car at the end of the PCP contract.

4. GMFV (Guaranteed Minimum Future Value)

GMFV stands for Guaranteed Minimum Future Value. It is a calculation used in PCP (Personal Contract Purchase) car agreements, to estimate the future value of a car.

Also known as a balloon payment, a GMFV payment is an optional final payment of a PCP agreement, which allows an individual to buy the cat they have been leasing ('borrowing') for an agreed period of time.

At the beginning of a PCP agreement, the finance/car provider will calculate the GMFV of the car. This is the expected value of the car at the end of the PCP agreement. This calculation varies according to the length of the PCP agreement, the model of the car itself and additional factors such as mileage and condition.

Regardless of the 'real' value of the car at the end of the PCP agreement, the customer will have to pay the previously agreed GMFV calculated sum if they wish to buy and own the car from the provider.

Let's look at an example: You want to lease a Vauxhall Corsa for 36 months as a PCP agreement. The current value of the car is £10,000. The car provider offers you a GMFV of £4,000. Should you accept, this would how much you would have to pay at the end of the 36 months if you wanted to own the car.

Things you need to know about Guaranteed Minimum Future Value

  • Providers will be conservative in their GMFV estimates, to avoid a loss at the end of the agreement.
  • A higher GMFV will reduce your monthly payments (however, other factors such as APR may increase the total amount repayable - be aware of these factors).
  • At the end of the agreement, if the actual value of the car is less than the GMFV, you can simply return the car and start a new agreement.

5. Deposit Contribution

A deposit contribution means that the manufacturer/provider is contributing an amount towards the car (essentially, it's a discount).

However, there are usually conditions to receive this contribution - you may have to use the manufactures/providers own finance options, as opposed to sourcing your own. This is simply a way of ensuring you use their services, and is a simply way to get a quick discount on a car agreement. 

Still Confused?

We hope this has helped you to understand some of the key terms associated with buying and leasing a car. Car finance agreements can sometimes be quite complicated, and it is easy to get similar-sounding terms confused with each other.

If you're still unsure about any of the terms mentioned, or if you have any additional questions about car finance and leasing, please visit our FAQs or feel free to contact us

If this post has helped you bust the car finance jargon - please share it!

posted by: lee 24 August 2015