Financial Terms Explained

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An interest-free loan - you repay only the amount of money you borrow. Such loans are often offered on items that manufacturers or dealers are keen to sell, because because it is an unpopular model or it is about to be replaced by a new model. The deposits may be large, sometimes up to 50% of the list price of the item.

APR

Annual percent rate. The true cost of a loan, including all the interest and concomitant charges and fees. The lower the APR is, the cheaper is the loan.

Balloon payment

The final payment at the end of a personal contract purchase (PCP).

Bank base rate

The interest rate set by the national bank. Finance houses add their own percentage to the base rate to calculate interest on loans. When the bank base rate changes, lenders' rates change accordingly.

Capital amount

The amount that you borrow from a lender.

Compound interest

The most common type of interest, where interest accumulates not only on the amount you borrow, but also on the interest itself if your regular repayments are less than the interest accrued during the regular repayment period.

Conditional sale

Another term for hire purchase (HP).

Cost to change

The difference between the trade-in price a dealer would give you for your car and the cost of the car you would buy from the dealer.

Deposit

The amount of money you pay towards the cost of the item at the time of the purchase.

Depreciation

The amount of money the item loses in value over a given period, usually annually.

Early repayment

If you decide to repay a fixed-term loan before its termination date, the lender will almost certainly charge you an early repayment penalty. Such penalty typically decreases over time, until it disappears after after a stated period.

Equity

The difference between the prevailing value of the item and the amount of money you still owe for it. If what you owe is greater than the value of the item, it is called 'negative equity'.

Fees

Extra charges added by the lender. Be careful to understand the full costs of the loan by looking at the annual percentage rate (APR).

Flat rate

The amount of interest payable per year as a direct proportion of the amount borrowed, without compounding. It is also called simple interest.

HP

Hire purchase. The total amount you pay, ie, the purchase price of the item plus any interest through the entire payment period, is divided into equal monthly payment installments. Only after you have paid the final installment does the item belong to you. Failure to repay the loan will result in the item being repossessed by the lender, who will then sell it to recover the outstanding debt.

Interest only

Your regular repayments to the lender cover only the interest accrued during the regular repayment period. The capital amount of your original borrowing remains the same, and must be repaid at some fixed future date.

MGFV

Minimum guaranteed future value. Most vehicle manufacturers guarantee that a car will be worth a certain amount at the end of the personal contract purchase (PCP) payment period, usually equal to the final lump sum you can pay to buy the car outright. If the car is worth less than this, you can hand it back to clear the loan. If it is worth the same or more, you may be able to use its value as a deposit on a new car.

PCP

Personal contract purchase. The monthly repayments are made lower by setting aside part of the vehicle's value as a lump sum to be paid at the end of the loan period. You can either pay the lump sum and own the car outright, or use your stake in the car as a deposit to buy a new one.

Personal loan

This is similar to hire purchase (HP), but the loan is unsecured; so, the lender can not repossess the item if you do not repay the debt. The lender can, however, still sue you in court to recover the money still owed.

PX

Short for part-exchange, meaning that you trade in your car or other item as partial payment to get a new one. Its part-exchange value is usually considered to be much less than its actual value, because the trader must resell it.

Repayment mortgage or loan

Your regular repayments are greater than the interest accrued during the regular repayment period. Thus, the capital amount that you borrowed decreases periodically. This means that the accrued interest proportion of the repayments and the amount you owe both became steadily less, until the capital amount is paid off completely.

Residual value

The value of your new car or other item after a specified period of time and / or usage, according to trade reckoning. For example, three years or 60,000 miles, in the case of a car.

Secured loan

A loan which gives the lender a lien on your property. If you default on the loan, the lender can take possession of the property, and sell it to recover the debt.

Simple interest

See 'Flat rate'.

Trade value

The estimated price your car or other item would fetch if sold at auction or by one dealer to another. It is always much lower than the price dealers charge retail customers.

Unsecured loan

A loan which does not give the lender a lien on your property. There is greater risk to the lender, and such loans are there before more expensive.

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Source by William Newart