Understanding car finance jargon

When choosing a car finance agreement, it's vital to know what you're signing and exactly what the terms and conditions are. If you're uncertain what some of the finer points of your contract mean, the following explanations may help:

Balance financed

This amount is the selling price of the car less your deposit and any part exchange allowances made. You will need to borrow this figure as the finance on the vehicle.

Balloon payment

A lump sum deferred to the end of certain finance agreements e.g. Lease Purchase and Personal Contract Purchase. Also known as the vehicle's Guaranteed Minimum Future Value, it must be paid at the end of the term to take legal ownership.


The speed and extent at which the vehicle loses its value over time. All vehicles will eventually be subject to depreciation – the rate at which this happens will vary from model to model.

Early settlement

Paying off the finance agreement before the scheduled end of the term. Settling the balance on the vehicle early can save on any interest due.


The difference between the market value of the car as agreed by the lender and the remaining balance outstanding on the finance agreement.

Gross and net incomes

Gross income is your total income before tax and National Insurance are taken into account. Net income, on the other hand, is the value remaining when both of those figures have been deducted. Both of these values may be asked for when you complete your car

Residual value

The value of the model when the finance agreement finished, based on the mileage, resale value and the length of the agreement itself. This is not always guaranteed, and will depend on the terms and conditions of the contract you select.

Secondary rental

When a leasing agreement ends, you can typically arrange a secondary rental to continue using the vehicle. This is often in the form of either monthly payments or a set annual rental.

Trade value

This is how much the car would be worth if it was bought by a dealer or sold at a vehicle auction. Some finance companies will only lend up to the full trade value of the model in question.


The 'Vehicle Identification Number', used to track the model's identity and prevent fraud. Unlike the number plate, this unique number can never be changed.

Discover your many car finance options at Lookers – get in touch with any of our dealerships.