Glossary Of Terms

3 + 35

The number of initial payments payable by way of deposit followed by the number of payments to be made.

Application Fee

An initial fee, often levied by finance companies, payable on signing of a finance agreement.

Approved Mileage Allowance Payment (AMAP)

See ‘Pence per mile’.


Annual Percentage Rate - The true rate of interest you are paying on a finance agreement.

Balloon Payment

The final payment of a finance agreement.

Benefit In Kind (BIK)

If an employee uses a company-owned car for their work commute and private use, then this is the rate of tax they pay, according to their income. Exactly how much is decided by the value of the car, CO2 emissions (the lower these two figures, the less it will cost) and whether it has a petrol or diesel engine. Electric and hybrid vehicles also have a lower BIK rate.


The reduction in value of a vehicle caused by age, mileage and condition.

GAP Insurance

Insurance covering losses arising as a result of the amount payable by insurers in the event of a write-off being insufficient to clear the outstanding finance.

Guaranteed Minimum Future Value (GMFV)

Also known as ‘Optional Final Payment’, GMFV is how much a car will be worth at the end of a contract. It protects the customer against any potential fall in used vehicle values.

Hire Purchase (HP)

A purchase system which spreads the cost of a vehicle, allowing the buyer to pay for a vehicle in regular, usually monthly, instalments while being able to use it. If the buyer fails to make a payment, the vehicle may be possessed.


Manufacturers Recommended Price Residual Value - the value of the vehicle at the end of the agreement, normally estimated at the beginning of any agreement.

P11D Value

The value of the vehicle, being the price when new together with the cost of extras. This value is used by the Inland Revenue for taxation purposes.

Personal Contract Purchase (PCP)

Similar to hire purchase and contract hire, a PCP deal allows a motorist to drive a new car by paying a certain amount every month over a fixed term, typically two to four years. Ownership of the vehicle remains with the funding company unless the customer chooses to acquire the vehicle at the end of the contract for a previously agreed total cost. If they decide against buying out the car, the customer can simply return the vehicle.

Pence per mile (PPM)

The rate a business pays an employee to use their own privately-owned car for business purposes (i.e. driving to meet a client).

Road Fund Licence (RFL)

See ‘Vehicle Excise Duty’.

Service, Maintenance and Repair (SMR)

An over-riding term for mechanical and technical attention needed by a fleet car. Depending on the provider, an SMR package typically includes routine servicing, unexpected repairs, and replacement tyres amongst others.

With Maintenance

The element within a finance agreement which covers servicing, repairs and tyre replacement.

Whole Life Cost (WLC)

The total cost, including depreciation, servicing, fuel etc., incurred in running a vehicle for a defined period of time.

Vehicle Excise Duty (VED)

Frequently and mistakenly referred to as ‘road tax’ (much to the frustration of cyclists), VED is the rate you pay to the Government to drive your vehicle on UK roads. How much you pay is decided on how much CO2 your car produces.

Comparison Contract Hire Finance Lease Contract Purchase PCP Lease Purchase Hire Purchase Personal Lease Outright Purchase
Accurate Monthly Budgeting Yes No Yes Yes No No Yes No
How many payments upfront? 0-6 0-6 0-6 0-6 0-6 10%-20% 0-6 No
Is VAT chargeable on Payments? Yes Yes No No No No Yes No
Is VAT reclaimable on payments 50% 50% n/a n/a n/a n/a No n/a
Are interest rates fixed? Yes Yes Yes Yes Yes Yes Yes Yes
Are payments offset against Corporation Tax? Partially Partially Capital Allowances No Capital Allowances Capital Allowances No Capital Allowances
Does the customer own the vehicle at the end of the agreement? No No Optional Optional Yes Yes No Yes
Who carries the residual value risk? Finance Co. Lessee Finance Co. Finance Co. Lessee n/a Finance Co. n/a
Is there a depreciation risk? No Yes No No Yes n/a No n/a
Can a maintenance contract be included? Yes Yes Yes Yes Yes Not Normally Yes No
Is Road Fund Licence provided? Yes First Year Yes First Year First Year First Year Yes n/a
Is there a Balloon / Final Payment No Yes Optional Optional Yes No No n/a

Last updated: Wednesday 8 October 2014