Leasing Jargon Explained

If you’re thinking about leasing or financing your next car or van we think it’s important that you familiarise yourself with what for many can be a new and sometimes rather confusing jargon. This page will help you to learn and understand the Contract Hire and Leasing industry language and vocabulary.

3+35 Payment Profile

This is the standard way of describing a lease deal. The first figure is the number of initial payments that must be made up front as a deposit, the second the number of months over which the lease runs. So if the monthly lease figure was £250 per month, this would equate to £750 deposit or (initial payment), followed by 35 regular monthly payments of £250. This profile can of course be changes to suit your requirements.

Balloon Payment

Some agreements often have what is called a Balloon Payment at the end of the term. This is the amount the customer would have to pay in order to take ownership of a car.

Depreciation

Depreciation describes the reduction in the car's value over time. This is normally attributed to factors such as the vehicles age, mileage and general condition. A vehicle will always depreciate the most during its first year on the road, but this figure varies between makes and models.

GAP insurance

Should your vehicle be stolen or written off following an accident, your insurance company will generally offer you a payment based on the market value of your vehicle at that time. This is often significantly less than the outstanding balance of any finance settlement and nowhere near enough to replace it with another vehicle like the one you've lost. This leaves you to find the money - often thousands of pounds - to make up the difference.

GAP Insurance will pay you the difference between your insurance settlement and the amount you originally paid for your vehicle - providing ample funds for a deposit on your next vehicle.

MGFV

MGFV stands for Minimum Guaranteed Future Value – what the vehicles value will be at the end of the agreement. Where there is a MGFV, you are borrowing the difference between the car's current price and its MGFV. Of course, if the vehicle is worth more than the MGFV, this can in most circumstances be used as a deposit on another vehicle.

P11D value

This is used by the Inland Revenue for taxation purposes. They calculate the P11D value based on how much the vehicle cost to buy when new plus the cost of any additional extras (metallic Paint, Satellite Navigation etc).

Benefit In Kind

Benefit in kind (BIK) is a term used by the Inland Revenue to work out your tax liability on your company benefits. So for example, if your car and the fuel are provided by the company you work for you are required to pay tax on its total value. This is calculated using the P11D value of the vehicle (see above) the vehicles CO2 rating and your Income Tax band.

PPM

PPM stands for pence per mile and is used when you agree to lease a vehicle and choose to limit the vehicle to a set mileage. Excess mileage charges will apply if you hand the vehicle back and have exceeded the total contracted mileage. This is charged in pence per mile (which will be clearly shown on your contact).

Maintenance

This is a phrase that means some degree of servicing and maintenence is included in the deal. You should check what exactly is covered (e.g. are new tyres included?).

VED

This stands for Vehicle Excise Duty, more commonly known in the UK as road tax. Your new tax disc will normally be posted out to you before the old one expires automatically.

APR

The APR (or Annual Percentage Rate) is an industry standard calculation for working the annual rate of interest you will be charged and comparing the cost of borrowing. It takes account of all the costs involved over the term of the loan such as the amount of interest you pay and other costs such as arrangement fees. It is only a fair comparison if you compare APR’s on loans for the same amount over the same period of time

Allowable VAT

If a Contract Hire or Finance Lease vehicle is used for personal use, the company can only claim 50% the VAT back on the monthly payment.

Off Balance Sheet

’Off Balance Sheet’ is a term to describe a leased vehicle that doesn’t show up on a company’s balance sheet. This is because it isn’t ‘owned’ by the company. Instead, it is simply shown as a cost in the profit and loss account. In most instances this will offer the company a tax saving.