Jargon Guide
You’re telling me you don’t know your Balloon from your BIK? This handy guide will set you straight.
A 'Balloon payment', in car finance terms, relates to a final payment made at the end of a loan.
The balloon payment is often calculated with respect to the value of the vehicle at the end of the financing term, so the borrower can return the vehicle in lieu of making the balloon payment.
This adds an element of residual value risk, as the value of the vehicle may be less than the final payment.
This has given rise to finance companies offering a Guaranteed Future Value, so the customer, can, if desired, simply return the vehicle to the finance company at the end of the loan. This is particularly common in most reputable PCP offers.
Benefit in Kinds is the name for company car tax. When an employee is given a vehicle to use by their employer in addition to their salary the employee is liable to pay tax from their monthly personal salary. This takes into account the amount of CO2 emissions of the vehicle, the P11D value and the personal tax band of the employee.
Business hire purchase has many of the hallmarks of personal hire purchase.
The finance loaned to the customer is secured against the vehicle sold. 'Title' or ownership of the vehicle remains with the finance company until the end of the agreement, at which point the title transfers to the customer.
Agreements tend to be simply structured, normally up to a maximum of 5 years. There are, however, a number of additional considerations. Hire Purchase will show on your balance sheet, and as it is not covered under the Consumer Credit Act, there is no voluntary termination option. When proceeding with a business Hire purchase most finance companies will asked for all Vat registered companies to pay the Vat upfront as the deposit for the finance agreement.
As industry, expert Professor Colin Tourick writes in his book, Do the Maths, "In order to decide whether to lease or buy your vehicles, you will need to carry out a financial evaluation." Tourick goes on to look at the use of "discounted cash flow analysis" to determine whether buying or leasing is best in each situation.
Often the first question you should ask yourself when offered a vehicle is, "does the person providing me this quote have a vested interest in suggesting one type of finance?".
If you are in a dealership, the sales person may well have a commission structure that favours one particular type of finance product (often PCP), while an online leasing company typically does not offer purchase as an option.
If you would like more help in deciding whether buying or leasing is best for you or your business, we'd love to hear from you. Please feel free to get in touch with the team at office@pikeandbambridge.co.uk or 0131 563 7493.
The amount of C02 that a car emits while is use affects the amount of company car tax and road fund licence that you are required to pay.
Since 1974 the Consumer Credit Act has required most businesses that lend money to consumers or offer goods or services on credit to be licensed by the Office of Fair Trading. Trading without a licence is a criminal offence.
The Act also regulates the way in which consumer credit licensees must conduct their business. For example, there are rules on advertising, pre-contract disclosure, credit agreements and post-contractual information.
The Act also offers consumers protection with regards to cooling off periods, the right to withdraw and termination rights.
The 2009 Consumer Credit Directive added a number of supplementary aspects to the offering of credit.
Business contract hire is the most common form of vehicle funding for businesses. In simple terms, Contract Hire is a method of funding the use of a vehicle for a set period of time, but not the overall ownership of it.
It allows a customer (known as the lessee) to choose the vehicle they want, use it for a set period of time and an anticipated mileage and then give it back to the leasing company (known as the lessor) at the end of the period of hire.
The lessee is not responsible for the disposal or sale price of the vehicle at the end of the contract – which makes it a very easy and risk free way to run a vehicle.
The only risk to the lessee would be for any excess mileage driven or if the vehicle was not maintained and kept in good condition.
It is important to note, that many of the contract hire prices advertised in the media are quoted exclusive of VAT. However, except in very special circumstances, the full VAT on the contract hire is not recoverable.
There are also benefit in kind or company car tax implications for whoever drives the vehicle.
Contract hire is also sometimes known as an Operating Lease, although typically only the first year’s road tax is included in an operating lease.
Delivery fee is often added to the price or "list price" of vehicles.
Effectively the fee is part of the price as, save from driving to the manufacturer’s factory and picking up the car (not normally possible, even if you wished to), customers will always be charged this amount, normally around £500 but it varies with different manufacturers.
You will sign a delivery note when you take delivery of your new vehicle. The date and miles normally mark the start of the agreements and payments will begin with a month of signature.
One of the most frustrating aspects of the automotive industry, particular in recent times, is the amount of time it can take for a vehicle to be delivered, once it has been ordered.
To put the situation in context, with the economic downturn of recent years, manufacturers have, particularly in Europe, reduced the number of vehicles being built for stock and are building far more to order. This inevitably leads to far longer lead times than was previously experienced.
All of this means that, whether you are a business or an individual, you are best considering what car you would like 6 months before you expect to receive it. Whilst this may not always be necessary, it avoids coming up against real problems when the car you want is not available.
Document fees are often added to allow the 'headline rate' to appear lower in the fiercely competitive world of motor finance.
Particularly with online leasing companies, it is important to take note of all fees, from document fees, to delivery fees, to administration fees on things like personalised plates, as it is often the case that these effectively push up the monthly rental that is advertised.
When taking a vehicle on a lease agreement you will be asked to set a mileage limit. During the time, you have the vehicle you will be expected to stick within that mileage. If you do go over the limit then normally you will have to pay an excess mileage charge which will be stipulated by the leasing company. This can typically be found on your finance documents when you signed you lease contract.
Fair wear and tear refers to the condition of a car at the end of its finance agreement. If an individual has financed a car over 3 years whether that be contract hire or personal contract purchase, on return it does not need to be in 'showroom' condition, but must fall within the fair wear and tear guidelines.
These detail things like acceptable and unacceptable marks on the bodywork, chips in the glass, and damage to the interior.
Below is our downloadable guide to Fair Wear and Tear, taken from the British Vehicle Rental and Leasing Association (BVRLA) guidelines.
Finance Lease is particularly popular with businesses acquiring new commercial vehicles. The main reason for this is that it aids cashflow for businesses who would otherwise look at hire purchase as the finance choice for their new vehicle.
Were a business to hire purchase a commercial vehicle, the VAT would typically be paid up front. On a finance lease product the VAT can be spread out, and reclaimed over the term of the lease.
A Finance Lease transfers the majority of the "risks and rewards" of ownership to the lessee/customer.
There are two main differences between a Finance Lease and a Contract Hire (also known as Operating Lease) agreement:
Finance Lease can be structured with or without a balloon payment. In comparison a Contract Hire agreement always take into account a residual value set by the leasing company, but this residual value is not visible to the customer nor is it their responsibility.
The vehicle on a Finance Lease agreement is shown in the Balance Sheet of both the lessor and the lessee as a leased asset. Under Contract Hire, it is only the lessor (lease company) who lists the vehicle on their Balance Sheet.
Most commonly referred to as flat rate within the automotive industry, fixed interest rates apply to the capital only.
Fixed interest rates apply to the total amount borrowed and do not change during the term of the loan.
With fixed rates, customer repayments comprise capital repayment and interest. All regulated agreements must now display the APR as well as the 'total charge for credit'. This gives customers a clearer picture of what the actual interest rate is, once factors such as document fees have been factored in.
GAP insurance, sometimes referred to as Guaranteed Asset Protection insurance, should be considered when a new vehicle is leased or purchased. GAP insurance can be included in a new vehicle lease or purchase and it can also be included in the first year of your insurance for that new vehicle. So what does GAP insurance protect you from and why is it important?
Do you need GAP insurance?
You should consider GAP insurance at point of sale of your new vehicle if you are concerned that, in the event of a write-off or a theft, you won't be able to afford the difference between the finance outstanding on the vehicle and its market value. For example, if your vehicle is written off in an accident and the finance settlement figure is £15,000 but the vehicle, at the time of the accident, is only considered to be worth £10,000 by your motor insurance provider then there is a shortfall of £5000 that still needs to be paid to the vehicle finance provider. GAP insurance would cover that £5000 shortfall.
GAP insurance can be included for the first year of any insurance policy from a recognised motor insurance policy provider and this is certainly worth checking. However it is normally after the first year where GAP insurance is required most so it is worth considering additional GAP insurance cover for terms of three or four years.
What is GAP insurance?
GAP insurance pays the difference between the market value of the vehicle at the point of total loss and the original invoice price you paid or the amount outstanding on the vehicle finance, whichever is higher.
New vehicles lose value over time and this depreciation is often more, and occurs quicker, than the settlement of the new vehicle finance through monthly payments by direct debit.
Depreciation accounts for 50% of a new vehicles value in the first three to four years of its lifetime and it is often only after two to three years of a finance agreement that the settlement figure on the vehicle finance is lower than the market value of the vehicle.
If your vehicle is written off, or stolen and not recovered, in year two of the finance agreement then your motor insurance provider will only pay out based on the valuation of the vehicle on the day that it was written off or stolen. This valuation may be considerably lower than the amount of finance outstanding on the vehicle, and there will be a shortfall.
The shortfall needs to be met, you have no vehicle and no deposit for a new vehicle. It is this very situation why GAP insurance was introduced and the Financial Conduct Authority now require it to be offered to consumers when new vehicles are bought or leased.
Is GAP insurance worth it?
A GAP insurance policy for three years on a new vehicle will cost in the region of £400 and it is worth obtaining an exact quote for your type of new vehicle using the link below. The cost of a GAP insurance policy will be prove to be excellent value should an accident or a theft occur.
The cost of GAP insurance policies should not be 'rolled in to' the new vehicle finance agreement. This goes against FCA regulations and may invalidate the insurance policy in the event of a claim.
Should you decide to purchase a GAP insurance policy then we would recommend an independent, service led broker such as Jeffery Associates. They are a good example of a service-focused business we would recommend as an FCA registered firm who are experts on all types of insurance.
Leasing is a catch-all term that is sometimes used for all things from personal finance products to actual finance leases.
Leasing actually means a finance agreement where the end user does not take ownership, so not hire purchase, or personal contract purchase. Check that 'leasing' is what you actually want with a qualified expert.
Customer Maintained Contracts
This is when you have chosen to maintain your Contract Hire vehicle yourself, your responsibilities are based on the terms and conditions of your contract however tend to include:
Service and maintenance
Please ensure the vehicle is serviced and maintained at an authorised maintenance centre or repairer and is in line with the recommended manufacturer guidelines and using only genuine approved parts. Often the finance company have a list of outlets where your vehicle is to be maintained. Failing to get the vehicle serviced in-line with the manufacturer’s service schedule may invalidate the vehicle’s warranty, which could leave you liable for costs on repairs.
Tyres - The vehicle must have the tyres replaced when worn or damagers with the same specification as originally supplied with the vehicle. This is in accordance with the manufacturer’s standard specification. The load and speed rating should match the original specification.
Maintained Contracts
If you Contract Hire agreement includes a service and maintenance plan, all costs for parts and labour needed to meet those items in the service requirements will be met.
Maintained Contracts tend to include:
· All routine servicing as appropriate to your vehicle as determined by the finance company
· All oils and fluids required within the service
· Brake fluid change as per the service requirements
With a service and maintenance plan, you are also entitled to the replacement of any vehicle parts, that need to be repaired or replaced during the contract period. This is subject to the finance companies fair wear and tear policy. (please check with your finance company if the part you need placing is included in your service and maintenance agreement as not everything is always included).
All work is carried out in accordance with the manufacturer’s recommended change schedule, and it is your responsibility to ensure the vehicle is serviced at the correct intervals. The service light will come on and advise you when the service is due. Failing to get the vehicle serviced in-line with the manufacturer’s service schedule may invalidate the vehicle’s warranty, which could leave you liable for costs on repairs.
Maintained Contracts Exclusions:
Not everything is included in a service and maintenance agreement. Make sure you check what is and is not included before you agree to pay for an fully maintained agreement.
This is the full sum of money that the leasing/finance company will pay the manufacturer for the vehicle. This includes the list price of the vehicle, the price of options, the delivery fee, VAT, Registration fees and road fund licence.
This is the vehicle value needed for tax purposes with company vehicles. The P11D value takes into account the cost of the vehicle including any additional accessories, the first registration fee, first 12 monthly road fund licence, any delivery charges and VAT.
Part exchanging your vehicle can be time consuming and difficult. How do you know if you got the best price for your vehicle? Did the selling dealer increase the price of the new car, just to make it seem like a better deal for your part exchange?
Typically, the automotive trade uses a system of valuations based on the condition of your vehicle, among other things. Trade buyers will often use a system such as CAP that will give them a rough indication of the trade value of your car with 3 criteria - 'clean', 'average' and 'below average'.
These three criteria are based on things like the bodywork condition, tyres (trade sellers will typically have to replace any tyres that are less than 3mm and therefore lower your valuation accordingly), and especially your service history.
Ignore the hyperbole that the salesman uses and simply ask if they are able to share the trade prices for your particular vehicle (they should be able to print out a sheet showing all three condition-based values).
Finally, if you are basing the valuation of your car on what you have seen advertised on a website bear in mind the following:
· The advertised price on the website is very rarely the amount the seller expects to actually sell for.
· Trade sellers will always command higher prices, so base your comparison on other private sellers, or better still on the CAP valuations already discussed.
Personal contract hire is one of the fastest growing forms of acquiring a new vehicle. In simple terms, Contract Hire is a method of funding the use of a vehicle for a set period of time, but not the overall ownership of it.
It allows a customer (known as the lessee) to choose the vehicle they want, use it for a set period and an anticipated mileage and then give it back to the leasing company (known as the lessor) at the end of the period of hire.
The leasing company is able to reclaim the VAT on the purchase of the vehicle (whether a car or commercial vehicle). This means that the interest is added to the ex-VAT price of the vehicle and results in lower payments than traditional finance agreements such as hire purchase.
The lessee is not responsible for the disposal or sale price of the vehicle at the end of the contract – which makes it a very easy and risk-free way to run a vehicle.
The only risk to the lessee would be for any excess mileage driven or if the vehicle was not maintained and kept in good condition.
However, It is also much less flexible when compared to a PCP agreement, so you need to be sure you will want, and can afford, the vehicle for the full length of the contract.
It is important to note that many of the contract hire agreements you may see advertised are only for businesses (and often specifically for VAT-registered limited companies). They are also often shown as ex-VAT prices.
A Personal Contract Purchase is in essence a purchase agreement.
However, a predicted minimum future value (balloon payment) is offset until the end of the agreement - this is called a Guaranteed Minimum Future Value (GMFV). This is set and guaranteed by the manufacturer or finance company and allows the customer to know the smallest amount the vehicle will be worth at a point in the future.
PCP agreements will require customers to predict their mileage and stick to that prediction, as well as maintaining the vehicle to a certain standard.
HP is one of the most common motor finance products in the market. The finance loaned to the customer is secured against the vehicle sold. ‘Title’ or ownership of the vehicle remains with the finance company end of the agreement, at which point the title transfers to the customer.
Agreements tend to be simply structured, normally up to a maximum of 5 years.
The agreement is covered under the obligations of the Consumer Credit Act, including Voluntary Termination.
Road Fund Licence – This can also be referred to as car tax of vehicle excise duty. The registered keeper of the vehicle is responsible for paying this. In a Personal contract hire and a business contract hire the funder is the registered keeper of the vehicle so they pay the road tax which is included in your monthly rental cost.
Selling your vehicle privately should always mean you receive more money, however there are a number of considerations to bear in mind.
If your vehicle is worth more than £5000 pounds, most buyers will want the added security of buying from a trade seller, as well as often needing finance for that amount, so it may be difficult to sell a high value car privately. Ask yourself, would you hand over £15,000 in cash to a stranger?
It probably comes down most to how much you value your time. If things go well, you could get as much as £1000-£1500 more for your vehicle if you sell it yourself. However, if you actually get around £300 more and wait weeks to sell it, as well as paying for the advert to do so, you may be better off just selling your vehicle to the trade.
Settlement figure refers to the amount it will cost to settle the outstanding finance on a purchase finance agreement (typically HP or PCP).
If a customer wishes to 'settle' the agreement early, they are entitled to a rebate on some of the interest, as per the rules in the Consumer Credit Act.
Value added Tax – this is currently 20% as set by the UK Government
Voluntary termination (or VT) refers to a clause in the Consumer Credit Act that allows consumers (and not normally businesses) to return the vehicle with no penalty once half of the total amount payable has been paid.
This is a legal right, and cannot be disputed. However, it may or may not have an affect on your future ability to be accepted for credit.
Finance companies are not keen on this practice as it costs the finance company the interest (and therefore profit) they had factored in to the whole term. Their argument is that the interest would have been higher, had it been known that the consumer would exercise their right to voluntary termination.
Finance intermediaries, such as brokers, will also receive claw back on their commission, so will also typically not encourage the practice.
It is useful to speak to an expert if you are considering Voluntary Termination, if you would like more information please get in touch with one of our expert advisors and we’ll be happy to assist you with any questions you may have.
