car finance jargon buster
can't afford that new car you've always craved? considered finance but scared away by the multitude of acronyms that you're faced with in the brochures? help is at hand with this car finance jargon buster. this top 10 guide will help you break down the barriers associated with purchasing cars via pcp's or a 50:50 deal. so, if complicated acronyms like gmfv, ved or rv are the only thing stopping you from buying the car of your dreams, this guide to industry terms will help you on your way.
1. Guaranteed Minimum Future Value (GMFV) - This is what the finance company guarantees the car will be worth at the end of the agreement, ultimately ensuring that there are no depreciation worries for buyers.
2. Personal Contract Purchase (PCP) - Fixed, low and affordable monthly payments due to a large amount of the cars value being deferred to the end of the contact. This typically comes with a GMFV and flexibility at the end of the agreement to part exchange, keep or return the vehicle.
3. Contract Hire - A popular option for business customers who would rather hire a vehicle than own one, without the worry of depreciation or having to sell the vehicle on at the end of the agreement. Buyers taking this option can reclaim up to 50% of the VAT on their rentals, and benefit from reduced regular payments as opposed to one lump sum.
4. Vehicle Excise Duty (VED) - Most commonly known as road tax - and takes into consideration the vehicles fuel type and CO2 emissions. Also described as the amount of tax paid on any vehicle that will be used or parked on a public road.
5. Excess Mileage - Pence per mile charge applicable should the pre-agreed contract mileage be exceeded.
6. Residual Value (RV) - The future value of the vehicle taking in to account the age and mileage at the end of your contract. This figure is usually referred to as a percentage, so if a car is worth £20,000 new and is worth £10,000 after 3 years, then its RV after the 3 years will be 50%.
7. Wear & Tear - When normal usage of the vehicle causes deterioration. Buyers can also take out a maintenance contract, which is a one off payment that covers the cost of vehicle servicing requirements and maintenance items such as brake pads, discs and windscreen wipers to help combat the wear and tear of vehicle.
8. 50:50 - A deal which sees the customer pay 50% of the vehicle value as a deposit up-front and then pays nothing further until month 24 of the agreement. One of the three standard end-of-contract choices is then available (keep, return or part-ex). This deal is best for customers who still favour cash payments with the bonus of a guaranteed residual value.
9.Hire Purchase - Fixed regular payments spread over an agreed period with no mileage restrictions. Provided all payments are made by the end of the contract, the vehicle is then yours to keep. This provides the customer with an easy way of budgeting monthly outgoings.
10. GAP Insurance - If your car is written off or stolen, this insurance pays the difference (or 'gap') between the car invoice value and your insurance pay out.
Consumers Rushing Into Car Finance Purchases
Younger car buyers are happier to rent-to-own a car than older buyers and see car finance as an acceptable way to get the car of their dreams
Affordability now the number one consideration in the car purchasing process
Although just under half of consumers take at least one month to choose a car, many are then rushing into an ill-judged car finance decision, with 22% of car buyers in the UK taking a decision on car finance within two hours.
This purchase in haste, repent in leisure approach to car finance has been uncovered in a new survey of 1,000 UK car owners by BMW Financial Services. Of even more concern however is that consumers were found to be giving about as much thought to purchasing a sofa as they are a car finance package.
The survey also found that 55% don't consult their partner on car finance and make the decision entirely independently, in contrast to other big ticket items such as a new kitchen (63%), holidays (64%) and sofa (64%) which are all more likely to be joint decisions.
But attitudes to car ownership have changed, and savvier consumers have realised that buying a new or used car on finance now carries a number of advantages; in fact four in ten drivers now see finance as a 'perfectly acceptable' way to own the car of their dreams. The survey also reveals that a third of British drivers are happy to rent-to-own their car, which mirrors the recent uptake in car finance sales seen by BMW Financial Services. Of those who are happy to rent-to-own, the majority are younger car buyers (35% of 18-24 year olds and 37% of 25-34 year olds) while those aged 65+ prefer to own outright - even if it means that just over a third of drivers feel they have compromised on their car purchase due to price constraints.
In deciding on the make and model of a car, British drivers are looking for:
Affordability / within budget (93%)
Functional features (size, number of doors, boot space 90%)
Fuel economy (89%)
Driving performance (83%)
Resale value (54%)
Brand image and status (38%)
With two thirds of us changing our spending habits, affordability has come to the fore as the key consideration when choosing a new car. Many drivers though are making greater compromises on the make, model and spec of their vehicle, than they need to. Buying car finance from a dealer was once considered a naive move, like buying travel insurance from a travel agent. Today however what's on offer from your dealer will often have a better APR than the high street banks can provide, and comes with a host of benefits, including warranty and free breakdown cover, bundled into flexible and increasingly innovative packages.
Buyers are wising up to the fact that owning a depreciating asset outright just doesn't make sense. By purchasing via finance however certain products offer a protected residual value, which is often higher than the genuine value at the end of the payment plan allowing the difference to be used as a deposit on a new car. Other buyers have realised that extras can pay for themselves when buying with finance - as they enhance and protect the residual value of a vehicle even further.
But when it comes to choosing a car finance package to own the car of their dreams, 43% of current car finance users did no research. Going into a dealership to purchase car finance without doing any research is not a good idea. Yes, dealers are better at presenting and explaining all the options than they have been in the past, but investing some time into research will give buyers the confidence to drive the conversation.