The way we buy cars has changed dramatically over the last decade or so.
Figures from the Finance and Leasing Association (FLA) suggest that 90 per cent of all new car sales involve finance provided by one of its members. Separate data shows that last year 2.4 million cars were bought using finance options.
However, YouGov data shows that 85 per cent of car owners say that the idea of being in debt is stressful and almost a third (31 per cent) say that financial matters confuse them.
Read more:Â Car leasing scams â€“ how to avoid the cons
Much of the confusion around car finance is caused by the terminology used by dealers and around the contracts.
To help confused consumers, we spoke to Kirk O’Callaghan, operations director at Car Shop, to bust some of the jargon around finance.
APR stands for annual percentage rate. This figure indicates the annual rate of interest attached to your loan (including any fees) so you can determine the overall annual cost of your finance package. Itâ€™s always best to check the APR as well as the total amount payable, as that shows how much you will actually pay over the period of the loan.
The optional large final payment at the end of a PCP deal, also know as the guaranteed minimum future value.Â You can chose to pay this and take ownership of the car or return the car to the dealer.
This refers to the value your car loses over time due to age, mileage and wear and tear.
A fixed rate means that your monthly payments are unaffected by interest rate changes and will remain the same each month.
This is the monthly interest rate youâ€™ll pay, and doesnâ€™t include admin fees. Beware of confusing this with the APR as this doesnâ€™t take account of any fees.
If you have an accident or your car is stolen, standard car insurance will only pay out the equivalent value of the car at the time the incident occurred â€“ but youâ€™ll still be liable to pay off any finance agreement you took out on your car in full. As the name suggests, gap (guaranteed asset protection) insurance covers the difference between the insurance payout and the amount left to pay.
A form of car finance where you agree to make monthly payments for a fixed term. Once your final payment has been made, you own the car. Personal loans work in a similar way, but you own the car from the beginning.
Stands for personal contract purchase. This is a popular form of car finance and often sits alongside hire purchase. You put down a deposit and then pay monthly installments; when the agreement comes to an end, you can either pay the balloon payment to keep the car, or simply hand it back and move on.
This is the future value of your vehicle at a certain point in time. The residual value is determined by the car’s resale appeal, its mileage and the length of your finance agreement. Often used for calculating guaranteed minimum future value, which affects how much you pay each month.
SAF Specialist Automotive Finance
SAF is a scheme introduced by the Finance and Leasing Association to enable retailers to test their teams to ensure they’re trained to an approved level. All relevant team members have to be re-tested each year. This is to ensure they understand the products they are offering and give good advice to consumers.