Car finance glossary & jargon buster
At Mon Motors, we aim to deliver exceptional service by making every step of your journey as clear and straightforward as possible. Whether you're new to car and van finance or looking to refresh your knowledge, our glossary explains the key terms you may encounter when considering how to purchase your next vehicle.
A
Advance Payment
A one-off, upfront payment made at the start of your Motability lease. It covers the difference between the cost of your car and your allowance paid over the length of your agreement. It’s not a deposit and is non-refundable.
Agreement term
The agreed period of time in which you have agreed to repay the finance.
Amount of credit
The total amount you borrow from the lender to finance the vehicle.
Annual mileage
The number of miles you're allowed to drive each year as part of your finance agreement. If you go over, you may be charged an excess mileage fee.
APR (Annual Percentage Rate)
The total yearly cost of borrowing, including interest and any compulsory fees.
B
Balance
The outstanding amount left to pay on your finance agreement.
Balloon payment
A large final payment due at the end of a PCP deal if you choose to purchase the car.
Broker
A third party that arranges finance between you and a lender. Brokers may charge a fee or earn commission from the lender.
C
Cooling-off period
A legal period (usually 14 days) where you can cancel your agreement without penalty.
Credit agreement
The legal contract between you and the finance provider outlining the terms of your finance deal, including payments, term, interest, and rights.
Credit score
A number that reflects your credit history and affects your chances of being approved for finance.
D
Deposit
An upfront payment towards the cost of your vehicle, reducing the amount you need to finance.
Depreciation
The rate at which your car or van loses value over time.
E
Early settlement
Paying off your finance agreement before the end of the term, often involving a settlement figure.
Equity
The difference between your car’s value and what you still owe. Positive equity can be used towards your next car. Read more about selling your car and part exchange it here.
Excess mileage fee
An additional charge you may face if you exceed your agreed mileage limit.
F
FCA
Refers to the Financial Conduct Authority who are an independent body that regulates financial services in the UK and enforces fair finance practices.
Fixed-rate interest
An interest rate that stays the same for the full term of your agreement.
Flat rate
This is the rate of interest that is charged for taking out finance. With flat rate interest, the rate will stay the same for the duration of the car finance agreement.
Final payment
The last payment due under your finance agreement, which may include an optional balloon payment if applicable.
G
GAP insurance
Also known as Guaranteed Asset Protection insurance, is an optional coverage that helps cover the difference between your insurance payout and your outstanding finance if your car is written off or stolen.
Guaranteed Future Value (GFV)
Represents the estimated value of your car at the end of the finance agreement, taking into account fair wear and tear. This value may be lower than expected if the vehicle has been involved in an accident or has experienced significant issues.
Guarantor
A person who agrees to take over your finance repayments if you’re unable to make them. A guarantor is usually a parent or close relative and is often required for applicants with little or no credit history.
H
Hire purchase (HP)
A finance option where you own the car after making a deposit and monthly payments. Learn more about HP here.
I
Interest rate
The percentage charged on the loan amount as the cost of borrowing. It’s applied to the outstanding balance and calculated over the duration of the finance agreement.
Invoice price
The amount that the dealer paid to the manufacturer for the vehicle. It is the cost basis for the car before any markups or dealer fees are added.
Initial payment
Often used in leasing, this refers to the first (usually larger) payment made at the start of the agreement, separate from a deposit.
L
Late charge
A fee imposed by the lender when the borrower fails to make the scheduled loan payment by the due date.
Leasing
A long-term rental agreement where you return the car at the end without owning it. Examples of finance types include Personal Contract Hire and Business Contract Hire.
M
Mileage allowance
The maximum number of miles you can drive each year as part of your PCP or lease agreement. Set out in your agreement, it helps preserve the car’s value by accounting for expected wear and tear.
N
Negative equity
This occurs when the amount you owe on your finance agreement is more than the current value of your vehicle. It can happen early in a finance term when the car’s depreciation outpaces your repayments, or if the vehicle’s value drops due to damage or market conditions.
O
On the road price
The OTR (On the Road) price is the total cost you’ll pay to take ownership of a vehicle and legally drive it away from the dealership. It includes the vehicle price, VAT, delivery charges, number plates, the first year’s road tax (Vehicle Excise Duty), and the DVLA registration fee.
Option to purchase fee
A small, optional fee paid at the end of selected finance agreements, usually Hire Purchase (HP) or Personal Contract Purchase (PCP), if you decide to take full ownership of the vehicle. Once paid, ownership of the vehicle transfers to you.
P
Part exchange
A process where you trade in your existing vehicle as part of the deal for a new or used car. The value of your current car is deducted from the price of the one you’re purchasing, often used as a deposit or contribution towards your finance agreement. Read more on selling your car here.
Personal Contract Purchase (PCP)
A flexible finance option offering lower monthly payments compared to Hire Purchase (HP). You pay a deposit followed by fixed monthly instalments, covering only part of the vehicle’s value. At the end of the agreement, you can either; Return the car with nothing more to pay (subject to mileage and condition), pay the optional balloon payment to keep the car, or part exchange it for a new one. It’s ideal if you like to change vehicles regularly and want flexibility at the end of your term.
R
Refinance
The process of replacing your current finance agreement with a new one, either with your existing lender or a different provider. Refinancing can help lower your monthly payments, extend the term, or pay off a balloon payment at the end of a PCP deal.
Representative APR
The advertised interest rate offered to the majority of approved applicants
Residual value
The predicted value of your car at the end of a PCP or lease agreement. It’s calculated at the beginning of your contract and plays a key role in determining your monthly payments.
S
Soft search
A type of credit check that doesn’t leave a visible mark on your credit file or impact your credit score. Soft searches are often used for eligibility checks and finance quotes, helping you explore options without affecting your future credit applications.
T
Term
The length of time you agree to repay your finance, usually expressed in months (e.g. 36 or 48 months). The term affects both the size of your monthly payments and the total cost of borrowing.
Total amount payable
The full amount you’ll repay over the duration of your agreement, including the vehicle cost, interest, fees, and any optional charges.
V
Variable rate
An interest rate that can change over the course of your finance agreement, usually influenced by fluctuations in the lender’s base rate or the Bank of England rate.
W
Warranty
A form of protection that covers specific repairs or faults for a set period of time. New cars often come with a manufacturer’s warranty (e.g. 3 years), while Approved Used cars may include a dealer or third-party warranty. It gives you peace of mind against unexpected repair costs during the covered period.
Wear & tear
The natural deterioration of a car through everyday use. Finance agreements, particularly PCP and leasing, expect vehicles to be returned in good condition with only fair wear and tear. Excessive damage or poor condition may result in end-of-contract charges.
Write-off
When an insurer deems a car uneconomical to repair following theft or accident damage. In finance agreements, if your car is written off, you may still owe money to the lender. This is where GAP insurance can help cover the shortfall between your insurance payout and the remaining finance balance.
Z
Zero deposit
A finance deal where no upfront deposit is required.
Still have questions?
Explore our FAQs section for quick answers, or contact your local Mon Motors dealership in Bath, Bristol, Cardiff, Cheltenham, Gloucester, Merthyr Tydfil, Newport, and Weston-super-Mare for personalised guidance.