Glossary

Annual Mileage

Annual Mileage is a car finance term that refers to the amount of mileage you are allowed to drive a financed vehicle each year under the agreement. It is normally only applicable to PCP, PCH and leasing finance and does not apply to HP or credit finance.

For each year, a maximum amount of miles that the car can be driven is set and should not be exceeded. This limit is decided when the agreement is taken out and agreed by both the lender and the customer. The limit is in place to ensure the car’s predicted value at the end of the car finance agreement is preserved.

As a customer, it’s important that you give a realistic expectation of the amount of miles you believe you will drive each year. If you give an annual mileage that is too low, you will go over the yearly limit and end up incurring a penalty per mile which you will be liable to pay. If you on the other hand set your annual mileage too high, then you will be paying too much for your monthly payments. You should notify your lender if your circumstances change significantly during your agreement term if the change might affect your annual mileage.

The penalty per mile will be set out before you sign the finance agreement. Normally, it’s set at pence per mile. This can quickly add up if you consistently go over the annual mileage limits during the term of your agreement.

You may want to try and calculate how many miles you drive each year before you go into any agreement. There are tools online that can help provide you with a figure. Alternatively, you can look at the MOT certificates for your current car over the previous years and look at the difference in mileage between certificates.

You can also make a note of your mileage at the start of the week and the end, recording how many miles you complete each week and multiplying it by fifty-two (weeks per year). You will also want to add some leeway to take any longer trips such as holidays or emergencies into account.

 

Agreement

A finance agreement is a contract between the lender (the finance company) and the borrower (you). It is legally binding, and sets out the exact schedule of payments for the credit. It also sets out all interest, fees and charges, as well as your rights and responsibilities.

 

APR

APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit offers. The APR takes into account not just the interest on the credit but also other charges you have to pay, for example, any arrangement fee. All lenders have to tell you what their APR for your information before you sign an agreement. The APR will vary from lender to lender.

 

Arrears

Failure to keep up with credit repayments results in an account being in arrears. The borrower has a financial and legal obligation to repay the arrears to the lender, be it an institution or a private individual.

 

Balloon Payment

A Balloon Payment is the term used for a final lump sum payment at the end of a Lease Purchase, HP to balloon or Personal Contract Purchase (PCP) agreement which must be paid in order to take ownership of a car.

Car finance agreements which include a balloon payment are generally only offered to those with good credit, who want to purchase a new or nearly-new vehicle

How is a balloon payment calculated?

This is agreed at the start of the car finance agreement, and is based on trade guides which give future predictions based on a number of factors, such as the make and model of the vehicle and how past models of the car have performed. It also takes into account mileage and the condition of the car.

In PCP agreements, these factors are controlled by the finance company by setting a mileage limit and condition requirements, should the customer choose to hand the car back rather than make the balloon payment. If the customer chooses to make a balloon payment then the extra charges will not apply, as the final payment will reflect the expected mileage and condition set from the start, with the customer taking responsibility if the real value of the car is less than the predicted residual value.

 

Confirmed Offers

These are offers were the lender has underwritten the customer application using their own credit and affordability checks. Confirmed offers can either be Conditional (subject to documentation / proofs) or Unconditional.

 

Credit file

Information relating to an individual’s credit and borrowing arrangements. Details are held with the credit reference agencies: Experian, Equifax and Callcredit. Lenders refer to a person’s credit file when assessing a borrowing application.

 

Credit search

Before processing your application a lender will contact a credit reference agency to obtain details of your credit history and any existing credit agreements you may have.

 

Credit Rating

There are five key categories of credit rating: Excellent, Good, Fair, Poor and Bad. If you have paid back debts on time and managed your credit well, you will generally be seen as having a good credit rating. If you have defaults, CCJs or any other adverse credit marks on your credit file, you’ll probably have a bad credit rating and could find it harder to get accepted for future credit. Your credit rating is analysed and assessed in a number of ways. The number of searches on your file, traceability of your previous addresses, being on the electoral roll, and how much credit you already have access to are tracked by the credit agencies. This is then used to calculate your credit rating.

 

Credit Score

Individual lenders will also assign you a credit score based on their specific criteria for lending.

 

Customer

The person contracting for goods and services supplied by FairSquare for personal use only and not for business use.

 

Dealer

The supplier of the car to FairSquare.

 

Deposit

A Deposit is an initial payment given as a guarantee to secure the purchase of your car with the balance of the deposit required by us or the lender being paid if the application for finance has been approved.

 

Depreciation

Depreciation is the amount of value that an asset loses from the original price that it was purchased for over a given period of time. Most assets will depreciate, and this simply means that they will be worth less once they begin to age and are more heavily used. While most people see a vehicle as a necessity, they will also understand that the more miles they drive in the vehicle and the older the vehicle becomes, the less it will be worth.

If you choose to use a Hire Purchase car finance arrangement, depreciation does not affect this type of finance as you will own the car outright by the end of the agreement. You may need to watch out for negative equity if you do not complete the finance agreement, but the vast majority of people will pay off the full finance amount on the car, so this is not an issue.

 

Early Settlement

If you want to sell your car or pay off the finance before the end date of the finance agreement, this is called an early settlement. Settling the agreement early will usually save the consumer money overall, as you pay less interest, although there may be a charge involved. Please read your agreement for your early settlement details.

 

Equity

Equity refers to the difference between the balance outstanding on the car finance agreement and the value of the vehicle. For example, if your car is worth £5,000 and there is £3,000 left to pay on the car finance agreement, there is £2,000 equity left in the value of the vehicle.

Negative equity is when the amount left on the car finance agreement is more than the value of the car. For example, if your car is worth £4,000 but there is £6,000 left to pay on the car finance agreement, there is £2,000 of negative equity.

There are a number of situations when the equity left in the value of your vehicle may become an important figure to note. If for any reason you need to settle your car finance agreement early, you may need to sell or part-exchange your car in order to pay the settlement figure (the amount of money still owed on the car finance agreement, plus any early settlement fees). If your car is worth more than the settlement figure, then you will be able to pay the figure using proceeds from the car with some equity left over. However, if your car is in negative equity (worth less than the settlement figure), you will still need to pay the remaining amount on the settlement figure to the finance company.

 

Excess Mileage

Some of the types of agreement we offer (such as PCP) have mileage limits. If you have exceeded your yearly mileage allowance, you may have to pay a penalty charge (usually charged per mile over your yearly allowance).

 

FCA

The Financial Conduct Authority. The independent UK regulatory body responsible for regulating all consumer credit firms in the UK. FairSquare Europe Limited are regulated by the FCA.

 

Financial Ombudsman Service (FOS)

The Financial Ombudsman Service, or FOS, is an impartial service appointed by parliament to help settle disputes between customers and UK businesses providing financial services such as banks, building societies, insurance companies, investment firms, financial advisers and finance companies. The FOS is completely impartial and independent.

 

Fixed Interest Rate

The term fixed interest rate is used to describe any interest rates that do not fluctuate over time. Instead, they stay at the set rate for the entire duration of the finance agreement. Should you choose an agreement with a fixed interest rate, you will be able to calculate the exact cost of the entire finance agreement from the start.

The key benefit of this type of interest rate is that you know exactly how much you will be paying across the agreement.

 

Flat Rate

When you have a car finance agreement that works on a flat rate of interest, it is calculated based on the initial amount borrowed. Unlike APR or other types of interest, it is solely based on the original sum borrowed and does not take into account the amount of money you have paid off.

The best way to explain is with an example. Let’s say we are borrowing £15,000 across five years at a flat rate of interest set at 5%. The interest on the credit each year is set at 5%, so in this example it would be £750 per year. The length of credit is five years, so the total interest is £3,750. The total repaid would therefore be £18,750.

  • £15,000 credit across five years at 5%
    • Amount borrowed: £15,000
    • Interest accrued: 5 x 5% of £15,000 = £3,750
    • Total amount repaid: £18,750

Let’s say you repay a total of £4,000 per year. In the fifth year of the agreement, despite the amount owed having been reduced by £16,000 you are still paying interest based on the initial sum of £15,000.

 

Generate Offers

To generate offers also known as confirmed offers the customer will need to give some more information on top of what they gave to ‘Create Account’ for ‘likely quotes’. This additional information includes Income, Employment and Bank details. This information allows the panel lenders to run their own soft searches and check not only credit worthiness but also affordability.

 

Goods

Means all vehicles as defined, or other things to be sold by FairSquare to the customer.

 

Guaranteed Minimum Future Value (GMFV)

GMFV is calculated based on the predicted residual /future value of a vehicle, which in turn is calculated according to information from trade guides and takes factors such as depreciation, mileage and condition into account.

Guaranteed Future Value is a figure on which a balloon payment in a PCP agreement is based. After being agreed at the start of the contract, the GMFV will not change, meaning the balloon payment you were quoted at the beginning of the contract will not change. This is regardless of current market value of the car at the end of the contract.

In order to protect the GMFV, most lenders will set a mileage limit on a PCP contract. The mileage limit will be agreed at the start of the contract, and will affect the GMFV figure. This is because mileage can have a significant effect on the value of a used car – the higher the mileage, the less a car is worth. By imposing a mileage limit, the GMFV is protected. If you go over the mileage limit there is a fee payable, usually calculated by a set pence per mile over the limit.

This is most important if you decide to return the car to the lending company at the end of the contract, as they will want to ensure that the value of the car is as close to the GMFV as possible.

When you take out a PCP contract, it’s important to take the Guaranteed Minimum Future Value into account, as this figure will be the amount that you will have to make as a balloon payment at the end of a contract if you wish to take ownership of the vehicle. Because it’s based on the residual value, it will also have a role in determining what your monthly repayments will be. This is because they are calculated based on the difference between the cost of the vehicle at the start of the agreement and the Guaranteed Future Value or residual value.

 

Hard Search

This is where a lender credit check leaves a footprint on your credit file. This can happen when you choose to proceed with a chosen lender who has made you a confirmed offer based on them doing a soft search. If you choose to take a credit from that lender they will then leave a hard search on your credit file. When you take a credit it is standard practice that the lender will leave a hard search for that credit.

Lenders who don’t have soft search ability in order to underwrite you will have to leave a hard search whether they make you an offer or not and whether you accept the offer or not. In these cases you will be given the option as to whether or not you want these lenders to leave a hard search on your credit file.

 

Hire Purchase

Please read more about Hire Purchase in our product explanation: Balloon Payment – Full Purchase

 

ICO

The information Commissioners Office – formerly the Data Protection Authority.

 

Likely Offers

When FairSquare run a soft search they pull your credit history and credit score. This enables FairSquare to check an applicant against the score card and typical offers of its panel lenders. Thus customers are able to see offers they are likely to get from panel lenders without the panel lenders having any of the customer information yet.

 

Motor Vehicle

Includes a car, van, motor cycle and generally each and every accessory to and component thereof

 

Net Income

Net income is what is commonly referred to as “take home” pay or “disposable income”.

 

Personal Contract Purchase

Please read more about Personal Contract Purchase in our product explanation here

 

Personal Digital Assistant (PDA)

Mobile personal digital assistant.

  

Personal Credit

Please read more about Personal Credit in our product explanation here

 

Offer (not Quote)

In order to get a confirmed offer you’ll need to provide certain information such as your address, job, marital status and income and expenditure.

The lenders will then with the help of credit agencies use these details to determine the offer they are willing and able to give you – because all prices are dependent on an individual’s personal circumstances. An offer is usually only valid for a certain amount of time, for example 30 days. You have this time to choose whether to accept the quote or not. Once the offer has expired, you will need submit a new application for a new offer.

 

Residual Value

Residual Value refers to the value of the asset (in this case a car) at the end of the finance agreement. It is based on information offered by trade guides. This information takes into account depreciation, mileage and assumes that the car is in average condition for its age.

 

SECCI

The term SECCI refers to the Standard European Consumer Credit Information document that everyone who takes out a finance agreement must be provided with before signing the agreement. It explains all the charges, terms and requirements that must be met during the agreement.

 

Settlement

A payment to cover all outstanding money owed and end the agreement.

 

Soft Search

A soft search is a credit check that leaves no footprint on the customer credit file. FairSquare perform these type of searches as do most of the FairSquare panel lenders.

 

Term Length

When you apply for car finance, the phrase “term length” is used to describe the length of time you will be paying off the finance. This would usually be used described in years or months, for example “36 months” or “3 years”

The longer the term, the lower the monthly repayments will be as the cost is spread out, but you could also end up paying more overall if you choose a longer finance term to make repayments, as the amount you have borrowed will incur more interest. It depends on your situation which option is best for you. A short-term credit would have higher monthly payments, but you would pay off the cost of the car quicker and pay less interest. A longer credit term length would incur more interest; however, the monthly payments would be lower. Deciding which option is right for you is down to your own personal circumstances.

 

Total Amount Payable

The full amount you will pay over the term of your agreement. This amount includes the deposit, monthly repayments, any interest and scheduled fees.

 

Unsecured Credit

An unsecured credit is one that does not use any asset as collateral or security. These are normally only available to those with a very good credit rating due to the risk they hold with the lender.

Choosing an unsecured credit means that you don’t have the risk of having the car or item you have used the credit to purchase being repossessed. However, should you be unable to pay back your credit, you will still need to find some way to make the payments. If you do feel that you are going to have difficulty repaying your finance package, the first thing you should do is contact your lender and see what assistance they can provide.

It is important that you shop around when looking for an unsecured credit. As they are only available to those with a good credit score, you will want to ensure that you find a deal that is right for your credit circumstances.

 

VIN

A VIN is a unique number that every vehicle receives when it is manufactured. In the European Union, the VIN includes the world manufacturer identifier (the unique sequence of numbers assigned to each vehicle manufacturer) along with a sequence of numbers that corresponds to the characteristics and identification of the particular vehicle. The VIN of a vehicle is usually stamped into its chassis, to help keep it from being tampered with. However, it can be lost if you modify or rebuild your vehicle.

 

VT (Voluntary Termination)

Once you have repaid half or more of the Total Amount Payable on an HP or PCP, you are entitled to return the car without any further payments. You must have had a perfect payment history, along with full service history and the car must be in good condition. Voluntary Termination will not affect your credit score.

Legal disclaimer: FairSquare Europe Limited is a company incorporated in England & Wales (Reg No: 08023305). and having its Registered office address at 3 Brindley Place, Birmingham, B1 2JB. FairSquare Europe Limited is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities, Firm Reference Number 715086

We act as a credit broker not a lender. Fairsquare shall act independently in sourcing credit from our panel of funders.

As a credit intermediary, we maintain a panel of Lenders who are reputable and experienced in the motor finance industry and consumer credit sector and offer products and services to suit a variety of credit strengths.

FairSquare is committed to ensuring that applications for credit to finance your car are placed with the most appropriate funder for a transaction. As we act as a credit broker, we will receive a fixed commission for introducing you to a finance provider, any such amount a lender pays us will not affect the interest rate you pay under your finance agreement, all of which are set by the lender concerned.

Finance is subject to status. Applicants must be 18 or over.