A third of Brits are confused by financial terms. Are you one of them?

We get it—finance jargon isn’t exactly as simple as ABC.

In fact, even our most seasoned team members at Carparison occasionally scratch their heads over it (and trust me, as the new kid here, I’ve had my moments).

But here’s the good news: we’re here to make it all a lot simpler. That’s why we’ve compiled this A-Z of car finance jargon—to help you make sense of the terms and feel more confident, whether you’re diving into leasing or just curious about what it all means.

So grab a cuppa, get comfortable, and let’s tackle these terms together.

P.s I promise I do know my ABCs, there just isn’t a term for every letter of the alphabet.

woman hugging car

A

Accommodation

You might be thinking, “Easy, I know what that one means”. But alas, we are not talking about a hotel or AirBnB.

In the world of car financing, accommodation refers to someone taking out finance on behalf of someone else. This could be a parent taking out an agreement for their child, or a spouse doing the same for their partner.

While it’s not illegal, it’s rarely allowed. Extenuating circumstances may be considered, but only with prior written consent from the funder. If in doubt, it’s always best to check first.

Administration Fee/Processing Fee

If you’ve browsed deals on the Carparison website, you’ll have noticed a deal overview under each offer, detailing features and applicable fees.

One of these is the Processing Fee (also known as the Administration Fee). At Carparison, this fee is set at £298.80 inc VAT and covers the cost of securing, advertising, and processing the deal (plus delivering a 5-star service, of course!).

The Processing Fee is only payable once the order is placed and the finance application is successfully approved.

woman driving car smiling with sunglasses

B

Balloon Payment

Once again, I hear you ask, “Why are they babbling on about balloons when talking about finance?”

Unfortunately, this balloon has nothing to do with the kind you’d find at a kid’s birthday party (sorry to disappoint).

The balloon payment, formally known as the Optional Final Payment, is one of those terms many have heard of but often don’t fully understand. Simply put, it’s the final amount you’d pay if you want to own the car outright at the end of a PCP agreement.

While a larger balloon payment might make your monthly costs more appealing, it can leave you with a less-than-pleasant lump sum at the end—one that may even make ownership unaffordable. This is why many people choose to hand the car back instead.

So, how is a balloon payment calculated?

The dealer must disclose the optional final payment figure before you take out a PCP deal. This means there shouldn’t be any unexpected surprises at the end of your agreement (unless, of course, you terminate your contract early—then equity comes into play).

The balloon payment is also known as the car’s guaranteed minimum future value. This figure represents how much the car is expected to be worth at the end of your agreement, calculated using industry guides to predict depreciation.

Remember though, the interest you’re paying on a PCP covers the full cost of the vehicle—including the balloon payment—even if you don’t end up purchasing the car.

 

Business Contract Hire (BCH)

One of two types of Contract Hire (the other being Personal Contract Hire or PCH), BCH is designed for businesses looking to lease a vehicle—or even a fleet of vehicles—for a fixed monthly cost.

This allows companies to drive the latest models without the expense of ownership.

To take out a lease on BCH, you’ll need to be a Sole Trader, Partnership, PLC, or Ltd Company.

And what about VAT?

BCH rates are advertised excluding VAT, while PCH rates include VAT. Why? Because businesses can reclaim up to 50% or even 100% of the VAT on their lease, depending on the vehicle’s usage. It’s a tax-saving win for businesses.

 

Benefit In Kind (BIK)

It might sound like a lovely finance term, but let’s cut to the chase—a Benefit in Kind is a contribution you’ll have to pay if you use a company car for personal use.

In other words, it’s more money out of your pocket.

Not so lovely-sounding now, is it?

BIK is a tax charged on perks or benefits that an employee receives on top of their salary—like a company car they also use privately.

But how is it calculated?

  • Multiply the car’s P11D value (more jargon, I know, but don’t worry, we’ve got resources to explain that too) by the BIK percentage banding.
  • Multiply that figure by your tax band (20% or 40%).

Interested in diving deeper into company car tax? We’ve got plenty of resources to help you.

 

Broker

Mum, I made it!

That’s us – Carparison is a broker. Well, a leasing broker, to be exact.

The aim is to take the leg work out of finding your new car, van or commercial vehicle to lease.

Our mission? To take the legwork out of finding your next car, van, or commercial vehicle to lease.

As brokers, we scour the nation (so you don’t have to), teaming up with funders and dealerships to track down the very best lease deals.

Then, we bring them all together in one place—making your search as smooth and stress-free as possible.

two people sat in boot of car

C

Commission

Here’s how it works: we introduce you to the lease deal of your dreams, and in return, we earn a commission from the funder. Simple enough, right?

But let’s clear the air—Carparison is here to break the mold. Transparency, honesty, and integrity drive everything we do.

In fact, we’re proud to be the first leasing broker in the UK to offer full commission disclosures online, for both personal and business contract hire agreements.

But don’t worry, there is no favouritism. The commission doesn’t affect the ranking of the deal on the site.

It’s already baked into the advertised lease costs, so the ranking of deals on our site remains as fair as a judge at a bake-off.

 

Company Car Opt Out

Not a fan of the company car option?

No problem! You can opt out, and your company may provide a car allowance instead—perfect for putting towards a personal lease agreement.

Greater freedom in vehicle choice? Absolutely.
But here’s the catch: your company might still have rules about the age and manufacturer of the vehicle.

Just a heads up, the car allowance counts as additional income, which means it’ll be taxed at your usual rate. Plus, you’ll be responsible for all the extras—like maintenance, insurance, and anything else your new ride needs.

people in car with roof off and arms up

D

Depreciation

Not something you need to worry about with leasing—but for the sake of car financing (and this blog), let’s dig a little deeper.

Simply put, depreciation is the difference in a car’s value between the time you buy it and when you decide to sell it.

Curious about how this ties into leasing? Here’s the scoop:

Depreciation levels are already factored into the lease rates you see. These rates are based on covering the depreciation costs of the vehicle over the agreed term.

This is one of the reasons leasing can be so appealing—it lets you drive away in a better car at a better price compared to other financing methods, and without the hefty upfront cost of buying outright.

mum putting baby in car

E

Equity

A touchy subject, we know. More often than not, it’s not the number you want to hear.

Put simply, equity is the difference between the current value of your car and the amount of money you still owe on it.

So, what’s the deal with positive equity and negative equity?

  • Positive equity: Your car is worth more than you owe—yay!
  • Negative equity: Unfortunately, your car is worth less than you owe—ouch.

Negative equity is especially common with PCP agreements because there’s an option to buy the car. Depreciation hits hardest at the beginning of a vehicle’s life, and with fixed monthly payments spread across the full term, it’s likely you’ll be in negative equity for at least the first few years.

While many hope to finish their PCP agreement with positive equity (and maybe even a deposit for their next car), the reality is quite different. Most people end up handing the car back to the dealership without any equity built up in it.

Here’s the good news: with leasing, you don’t have to worry about equity from a resale perspective since there's no option to buy the vehicle outright.

However, equity does still matter if your car is stolen or written off. Why? Because your insurance company will only pay the current market value of the vehicle, and you’ll be expected to cover any difference owed.

Enter Gap Insurance (don’t worry, we’ll dive into that later). This handy safety net is there to cover the difference if you find yourself in this unfortunate situation.

woman resting against boot of car

F

Financial Conduct Authority (FCA)

Financial Conduct Authority is quite the mouthful, isn’t it? Thankfully, we can just call it the FCA.

The FCA regulates all financial services in the UK, ensuring customers stay protected and keeping leasing companies like us on our best behaviour.

 

Fleet Leasing

In the motor world, a fleet refers to a group of cars, trucks, or vans leased by a company or organisation, rather than an individual.

A fleet isn’t tied to a specific number of vehicles—it could be just two, or it could be 200!

What matters is that the company maintains and insures all vehicles in the fleet, rather than the individual drivers. (Just remember, if the vehicle is used for personal purposes, BIK tax might apply too.)

We’ve got our very own van man here at Carparison, and more information about Fleet Management too.

 

Funder

A funder is the organisation that owns and provides the rates for the lease vehicles we advertise. We make our money by introducing customers to a specific funder.

Some of the funders we partner with (but aren’t limited to) include:

  • Lex Autolease
  • Hitachi
  • ALD Automotive
  • Arval
piggy bank on dashboard

G

Guaranteed Asset Protection (GAP) Insurance

We fleetingly (see what we did there?) mentioned this in our Equity section, but now it's GAP Insurance's time to shine—let’s dive right in.

GAP Insurance is designed to ease the financial worry if your brand-new car is stolen or written off.

By taking out GAP insurance, drivers protect themselves from the difference between what they paid for the car and what the insurance company says it's worth.

As brokers, we're not in a position to sell or recommend specific GAP providers, but if you wish to add GAP insurance to your lease vehicle, you absolutely can.

woman driving car

H

Hire Purchase (HP)

Hire Purchase (HP) is one road to owning your car.

If you’re looking to drive away in a car and own it at the end, this is for you.

Unlike a PCP agreement (remember this one, we will circle around), where you might face the dreaded balloon payment, HP includes the full cost of the car right in your monthly payments. So, no surprise lump sums at the end (phew!).

Let’s break it down:

Say the car costs £15,000. You’ll pay a £3,000 deposit, and then spread the remaining £12,000 (plus interest) over 36 or 48 months.

How it adds up:

  • Total Cost Repayable: £15,000
  • Deposit: £3,000
  • Remaining to be paid: £12,000
  • 36-month contract: £333.33 per month

It’s a solid way to own your car, but just be warned—your monthly payments might be a bit higher than some other options.

But hey, it’s like buying a really cool coffee machine—worth it in the end!

woman driving with child in back of car

I

Initial Payment in Leasing

You might be thinking, “Initial Payment? Isn’t that just a fancy way of saying ‘deposit’?”
You wouldn’t be the only one—it’s a common mix-up.

But, when is anything in the finance world ever that simple?

Here’s the difference:

  • A deposit is a sum of money you usually get back at the end of an agreement (think of a mortgage deposit).
  • An initial payment, on the other hand, is an advanced payment when leasing a car. It’s equal to 1, 3, 6, or 9 months of your contract, and it’s non-refundable.

For example, if your lease is £250 per month, the initial rental options would look like this:

  • 1 x £250 = £250
  • 3 x £250 = £750
  • 6 x £250 = £1,500
  • 9 x £250 = £2,250

Now you know the difference—no more finance confusion here!

 

Interest and Annual Percentage Rate (APR)

APR—one of those terms you probably see everywhere. But what does it actually mean?

APR, or Annual Percentage Rate, is the annual cost a borrower pays to the lender for borrowing money. Simply put, it’s the interest rate you’re charged, spread across a year.

Interest is the cost of borrowing money, and with car finance agreements, it’s added on top of your monthly payments. Depending on the car and the agreement you choose, this rate could be as low as 0.9% or climb as high as 12% or 13%.

The best part? Leasing doesn’t come with additional interest charges - another big win for leasing.

man driving with woman next to him

J

Joint Lease Application

Want to lease with a buddy? A joint lease application allows two people to apply together for finance on a vehicle.

Here’s how it works: both applicants provide their personal details, combine their income information, and agree to share responsibility for the monthly repayments of the lease.

Here’s the catch - you need to live at the same address. And keep in mind, not all funders allow joint applications, so it’s always a good idea to double-check before you apply.

family in car with dog

L

Lease

This is our jam—we’re all about leasing.

Most similar to renting, vehicle leasing lets you use a car for an agreed period, under agreed terms, before handing it back at the end of the contract.

Unlike a PCP (I promise you’ll learn about this soon) there is no option to purchase the vehicle at the end of the agreement.

hands on wheel someone driving

M

Maintenance

Picture this: you’re leasing a vehicle, and you’re asked whether you’d like a "maintained" or "non-maintained" contract.

But what does that actually mean?

A maintenance contract lets you include the costs of maintaining your vehicle (those not covered by a warranty) in your rental payments.

Here’s what you get with a maintained contract:

  • Scheduled servicing
  • Items that perish due to wear and tear (think batteries, exhausts, and wiper blades)
  • MOTs (if applicable)
  • Tyre replacement or repair (depending on your finance provider)

While there’s an additional cost for a maintenance contract, it often reduces the overall cost of leasing. Why? Because the vehicle’s residual value improves when all recommended, main dealer maintenance is guaranteed.

So, if you like the idea of fewer surprises and smoother rides, a maintenance contract might just be worth considering.

man driving, kids in back with heads out window

P

Part-Exchange

Tired of your old car? Don’t have the time (or patience) to deal with selling it privately?

A part exchange is when you sell your current vehicle to help pay for, or partially fund, your next one.

While we don’t offer a direct part exchange service, our expert buying team is here to help. They can purchase your car from you, making it easy to put the money towards your lease deal—if that’s what you fancy.

 

Personal Contract Hire (PCH)

I told you we’d get here! Personal Contract Hire (PCH), AKA Personal Lease—whatever you like to call it—is what we specialise in at Carparison (alongside BCH, of course).

PCH is all about leasing for private individuals rather than companies, though it can also be used for business purposes.

Why? Because PCH includes company car opt-outs and cash allowances. It’s all coming together now, isn’t it?

 

Personal Contract Purchase (PCP)

Do you love the idea of driving a new car every few years? A PCP (Personal Contract Purchase) lets you do just that.

Here’s how it works:

  • Initial Payment: A one-off payment at the start of your agreement.
  • Monthly Payments: A set amount over an agreed duration (typically 36 or 48 months).
  • Balloon Payment: The final optional payment if you want to own the car.

At the end of your PCP agreement, you’ll usually have three options:

  • Hand the car back.
  • Use any positive equity (if you’re lucky) as a deposit for your next PCP agreement.
  • Pay the balloon payment (also known as the Optional Purchase Payment) to keep the car.

While owning the car might sound appealing, most people don’t choose this option in the end. Instead, they either return the car or roll into a shiny new PCP deal.

person on phone stood outside car

R

Road Fund License (RFL)

Ah, the Road Fund License, also known as vehicle tax or Vehicle Excise Duty (VED)—because nothing says fun like paying taxes, right?

In simple terms, this is the fee charged by the Government to legally keep your car on the road. The cost varies depending on your car’s emissions. For instance, zero-emission heroes like the Tesla Model 3 or Mercedes-Benz EQC are currently exempt (go green), while cars with higher CO2 emissions get hit with steeper charges.

The best part? When you lease with us, the cost of the Road Fund License is covered for the full duration of your agreement. So that’s one less thing to worry about—and more money to spend on snacks for your road trips. Win-win!

woman getting out car with coffee

T

Terms

You might be thinking, “Terms? That’s easy”. But don’t be fooled—it’s a term that can confuse even the best of us, especially if you’re new to the car finance game.

all we’re really after is how long you want to lease the car for, and how much you’d like to pay as your initial payment.

Here’s how it works:

  • 1 x 35 = 36 month agreement with 1 month’s initial payment
  • 3 x 47 = 48 month agreement with 3 month’s initial payment
  • 9 x 47 = 48 month agreement with 9 month’s initial payment

And that’s it. Simple enough, right?

man holding keys

W

Wear and Tear

With age comes wisdom – right?

Not for cars, they come with wear and tear – but that doesn’t quite have the same ring to it.

The BVRLA fair wear and tear guide is the industry standard, considering the natural deterioration of a vehicle based on its age and usage. It sets clear guidelines for what condition your car can be in when returned at the end of your lease.

The good news? You won’t be expected to return your car in showroom condition.

But here's the catch: misuse, neglect, or damage from careless driving or accidents? Not covered. Charges may apply if those standards aren’t met.

Car finance jargon decoded – Navigating the world of leasing

And there you have it—the car finance jargon decoded! We hope that wasn’t as painful as navigating a roundabout during rush hour.

Whether you’re looking to lease, buy, or just want to sound like you know what you're talking about at the next family gathering, we’ve got you covered. Now you can confidently dive into the world of car finance without fearing those scary-sounding terms.

Remember, if you're ever in doubt, we’re here to help—no jargon, no nonsense, just straightforward advice. So, go ahead, make your move, and drive away with the best deal!

Now you're a pro in leasing and finance!

Alice Poole

Alice Poole

Alice applies her extensive test drive experience and her passion for motors to bring you informed and characterful articles and vehicle reviews.