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We recently saw an article that stated that a third of British people are confused by financial terms; with the biggest questions being the difference between PCP, PCH and other finance options, as well as understanding APR and balloon payments. 

Now, cost transparency is one of our core values, and it is incredibly important to us that all of our customers fully understand the leasing process before they undertake an agreement with us. To that end, we have put our heads together and come up with a fully comprehensive guide to car finance and leasing jargon.

Here is our A-Z guide to all things car finance... 

A

Accommodation

When it relates to car financing, accommodation refers to someone taking out finance on behalf of someone else. This could be a parent taking out an agreement on behalf on their child, or perhaps even a husband/wife taking out the agreement on behalf of their spouse. Whilst not illegal, it isn't often allowed. Extenuating circumstances are sometimes permitted but only with prior written consent from the funder. If in doubt, contact your funder.

Administration Fee/ Processing Fee

Below every deal on the Carparison website will be a breakdown of the deal overview, detailing the inclusive features and applicable fees. One of these will be a Processing Fee (otherwise known as an Administration Fee), and in our case, the Carparison Processing Fee is a set cost of £234.00 including VAT. This covers the costs of securing, advertising and processing the deal (and providing you a 5* rated service along the way!). The Processing Fee is only due when the order has been placed and the finance application has been successful.

B

Balloon Payment 

The balloon payment, formally known as the Optional Final Payment, is one of those terms that many have heard of, but when it comes down to the nitty gritty of it, sometimes don’t quite understand. The balloon payment is the outstanding figure that is left to pay should you wish to own the car outright at the end of a PCP agreement.  A larger balloon payment may result in more attractive monthly costs, but a less than attractive lump sum that may make ownership unaffordable at the end (hence why many then simply hand the car back).

So how is a balloon payment calculated? One thing is 100% sure. A dealer will always have to give you the optional final payment figure before you take out a PCP deal – so there should never ever be any unexpected numbers when it comes to the end of your agreement. The only situation in which that might differ is if you decide to terminate your contract early, and then the question of equity is raised (see below in our guide for more info on that).

The balloon payment is also known as the car's guaranteed minimum future value, and is an estimate of how much the car will be worth at the end of your agreement. The dealer, or lender – whoever you’re getting the car from – will use industry guides to calculate how much the car will depreciate during the contract term. Remember, the interest you are paying on a PCP includes the full cost of the vehicle and this therefore includes this balloon payment even if you don’t end up taking it.

BCH (Business Contract Hire)

There are two types of Contract Hire: Personal Contract Hire (PCH) and Business Contract Hire (BCH). BCH is for companies wishing to lease a vehicle or fleet of vehicles for a set monthly cost, allowing them to save money on the cost of vehicle ownership whilst driving in the latest models. In order to take out a car lease on BCH, you must be a Sole Trader, Partnership, PLC or Ltd Company.

When advertised, BCH rates will be displayed excluding VAT whereas PCH rates are advertised including VAT. This is because, depending on usage, the business will be able to claim back either 50% or 100% of the tax on the vehicles they lease.

BIK (Benefit In Kind)

If you have a company car that you use for private use, then you’ll have to pay something called a Benefit in Kind (BIK) contribution. This is a tax charged on benefits or perks that an employee receives on top of their salary – i.e. a company car or private health care.

To calculate a vehicle's BIK tax, just multiply the P11D value with the BIK percentage banding and then times that figure by your tax band (20% or 40%). You can read more about company car tax here.

Broker

That’s us! Carparison are a broker, or a Leasing Broker to be exact, with the aim of taking the leg work out of finding you your new lease van, car or commercial vehicle. As a broker, we scour the nation, working with funders and dealerships to find the best lease deals on the market and offer them to you, all in one place.

C

Commission

This is the money Carparison earn from the Funder for introducing customers to the lease deal. Carparison are proud to lead the way as the first leasing broker in the UK to offer full commission disclosures online, for both personal and business contract hire agreements. This commission is stated clearly under each lease deal on our website, and importantly is already reflected in the advertised lease costs and does not affect the ranking of the deal on site. 

Company Car Opt Out

If an employee Opts out of company car, their company therefore may provide a company car allowance that they can use towards a personal agreement. Whilst this may mean greater freedom in terms of vehicle choice, depending on the company they still may stipulate the age and manufacturer that the vehicle must be. It is also worth remembering that the employee will be charged their usual tax rate on this additional income and will also then be responsible for the maintenance and insurance etc. for that vehicle.

 

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D

Depreciation

Whilst it’s not something you need to worry about with a lease, it’s something that many people have questions about. Vehicle depreciation is, simply put, the difference of a cars’ value between the time you buy it and the time you come to sell it. Find out more about vehicle depreciation and what it means when leasing.

E

Equity 

Equity is always a bit of a touchy subject when it comes to the car market (or indeed any market) as more often than not it’s not always the number you want to hear. Equity is essentially the difference between the current value of your car and the amount of money you have left to pay on it. Positive equity means your car is worth more than the amount you owe on it, and negative equity is the other way around – unfortunately it’s worth less than you owe. 

Negative equity can be particularly prominent with PCP agreements as there is the option to buy the vehicle. Vehicle depreciation happens disproportionately at the beginning of a vehicle's life and as monthly payments are fixed over the full term it is therefore likely that you will be in negative equity for the first few years of your contract at least. Many expect to end their PCP agreement in positive equity (and therefore have a sum to put towards their next car). But in reality that is very rarely the case and most people hand the car back to the dealership with no investment in it.

With leasing you needn’t worry about equity from a resale point of view, as there isn’t the option to buy the vehicle outright. However, as with all other financing methods, equity does matter if your car is stolen or written off. This is because the insurance company will only pay the current value of the vehicle and you will be expected to pay the difference. Gap insurance (which we discuss later on) is there to cover this difference if there is one. 

F

FCA

Commonly abbreviated to the FCA, the Financial Conduct Authority are responsible for regulating all financial services in the UK. Their role is to keep the customer safe and keep leasing companies like us in check. 

Fleet Leasing 

When talking motors, a fleet is a group of cars, trucks or vans that are leased by a company or an organisation rather than an individual person. A fleet doesn’t mean a set number of vehicles, it can be 2 or it can be 200 – but all of them will be maintained and insured by the company rather than the individual who drives them. The employee will just have to remember that there might be a BIK tax if the car is used for personal use.

We have our very own van man here at Carparison, so if you have any questions about Fleet Management, just get in touch. 

Funder

A funder is the funding body that owns and provides the rates for the lease vehicles we are advertising. We make our money by introducing customers to a particular funder. Some of the funders we partner with (but are not limited to) are:

  • Lex Autolease
  • Hitachi
  • ALD Automotive
  • Arval
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G

GAP Insurance

GAP or Guaranteed Asset Protection is designed to make a driver feel a bit less worried about the financial implications on them if their brand new car was stolen or written off. Those who take out GAP insurance are protecting their new car against the difference between what they paid for the car, and what the insurance company may say that the car is worth. As broker, we are not in a position to sell or recommend any GAP providers. But should a driver wish to take out GAP insurance on their lease vehicle, they may do so.

H

Hire Purchase (HP)

Hire purchase is a financing agreement taken out by those who wish to own the car at the end of the agreement. Unlike a PCP agreement where customers make a decision or not to pay an optional finance payment (balloon), the entire cost of the rental is incorporate within a Hire Purchase monthly payment. So, for example, if a car finance is worth £15,000, a customer may pay a £3000 deposit and then spread out the remaining cost and interest over a 36 or 48 month period.

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

Whilst this is a good way to own a vehicle, the monthly costs can be significantly higher than other financing options.

I

Initial Payment in Leasing

An initial payment is not to be confused with a deposit, as a deposit can be considered as a sum of money that you will get back at the end of an agreement (for instance when putting down a deposit on a mortgage). In contrast, when leasing, an initial rental is an advanced payment equal to 1, 3, 6 or 9 months of your contract.

So for example, for a lease that was £250 per month, the initial rental variants could be:

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

Interest and APR

We see it everywhere, but what does APR mean? Well, APR stands for Annual Percentage Rate, and is essentially the annual cost a borrower must pay the place they have borrowed money from. Interest is the cost of borrowing money, and as with any loan, interest is charged on certain car financing agreements on top of the monthly agreements. This could as little as 0.9% or even higher than 12 or 13% depending on the car and agreement you end up choosing. If a car is worth £20,000 and the interest is 10% then this means you will be paying an additional £2,000 of interest on that £20,000 loan. With leasing there are no additional interest costs making it another reason to choose a lease over other financing options.  

J

Joint Lease Application

A joint application means that two people can apply together for finance on a car by providing both of their personal details, combined income information and accepting that both parties will be responsible for the monthly repayments of said lease vehicle. Both applicants need to live together but it is worth pointing out that many funders only accept single applications – so it’s always a good idea to check with them before you think about applying.

L

Lease

Most similar to renting, vehicle leasing is the use of a vehicle for an agreed period of time, under agreed terms before handing the vehicle back at the end of the contract. Unlike a PCP (Personal Contract Purchase) there is no option to purchase the vehicle at the end of the agreement. You can read the full definition of vehicle leasing here.

M

Maintenance

When searching for your next lease vehicle, you will often see the words ‘Maintenance’ or perhaps the question ‘Would you like to add vehicle maintenance?’ but may not know the difference between a Maintained and a Non-Maintained contract.

A maintenance contract allows you to incorporate the costs of maintaining the vehicle that aren’t covered within a vehicle warranty within your rental payments. Some of the benefits of choosing a Maintained contract are:

  • Scheduled servicing
  • Items that perish due to wear and tear – things like batteries, exhausts and wiper blades.
  • MOTs (if applicable)
  • Tyre replacement or repair (this will depend on your finance provider)

While you will be charged for a maintenance contract on top of your lease payments, choosing a maintenance contract is likely to reduce the cost of the lease element. This is because the vehicle's residual values are improved as all recommended, main dealer maintenance is guaranteed. 

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P

Part Exchange

A part exchange is when you sell your current vehicle in order to pay, or partially fund your next vehicle. Whilst we don’t offer a direct part exchange service, we do have an expert buying team on hand who can purchase the car from you. Allowing you to put the money towards your lease deal if you’d like to. Find out more about our vehicle buying service here.

PCH (Personal Contract Hire)

PCH, Personal Contract Hire or Personal Lease… Whatever you call it, it's what we specialise in here at Carparison along with BCH.  PCH is leasing for private individuals rather than a company and can be used for personal or business use as PCH also includes company car opt outs and cash allowances. Choose your make, model, budget and agreement term and we’ll find you the best lease deal available.

If you have questions about which works best for you, just get in touch with one of our Leasing Experts.

PCP (Personal Contract Purchase)

A PCP is a financing option that allows you to purchase a new car every few years. When taking out a PCP there are essentially elements:

  1. An initial payment
  2. A set monthly payment over an agreed duration (i.e. 36 or 48 months)
  3. A Balloon payment

That’s the simplified version, and realistically when finishing a PCP agreement there are usually several options: Hand the car back, use any positive equity (if you are lucky enough to have any) as a deposit to start another PCP agreement or pay the agreed balloon payment also known as an Optional Purchase Payment. Whilst the idea of owning the car at the end may appeal to many, it’s worth noting that most don’t actually end up going with this option.

R

Road Fund License (RFL)

A Road Fund License, also known as vehicle tax or Vehicle Excise Duty is the taxation charged by the Government on all vehicles – new or old - in order to be legally allowed on the road. The cost of the RFL varies from car to car and is determined by the emissions that the car produces. Zero emission electric cars such as the Tesla Model 3 or Mercedes-Benz EQC are currently exempt from VED charges, whilst more polluting cars with higher levels of CO2 g/km emissions will incur higher rates.

The benefit of leasing? All of our rental agreements include the cost of the Road Fund License for the duration of the agreement so that’s one less thing for you to have to worry about. 

T

Terms 

This is a simple one, but one that can confuse the best of us if you’re new to the world of car financing! When asked about your preferential terms, it just means that we’re after how long you’d like to take out a lease for, and what initial payment you’d like to pay.

For example:

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

W

Wear and Tear

When returning a lease vehicle at the end of your agreement, it is important that you consider any wear and tear that the car has incurred. The BVRLA fair wear and tear guide is an industry-wide standard which considers the natural deterioration of a vehicle, taking into account its age and usage, and sets an example of what condition a car can be returned in. The wear and tear guide should give reassurance to many that a car is not expected to return at the end of your agreement in showroom condition. However, what must be understood is that misuse, neglect or damage due to careless driving or road collisions will not be included and charges may apply if these standards are not met.