Vehicle Leasing Glossary

Vehicle Leasing Glossary

As with the world of car finance, car leasing is filled with its own, often unique language of terms, phrases, acronyms and abbreviations that can at times be rather confusing. So, to help you navigate these safely, we’ve put together a comprehensive ‘leasing’ glossary. To help even more, we’ve included a number of crossover terms that you might also find on standard car finance agreements:

3 + 35

If you come across this phrase, it’s simply stating the number of payments your initial deposit will consist of (3), plus the number of subsequent monthly payments throughout your agreement (35). The number of initial payments payable by way of deposit followed by the number of payments to be made.

Advance Rental

This is an initial payment – like a deposit - of up to 50% of the total rental value. There is no upper limit to these Advance Payments on a personal contract purchase agreements.

Application Fee

Application fees can be applied by finance companies, and are payable when you sign the finance agreement.

Approved Mileage Allowance Payment (AMAP)

This is explained in our ‘Pence per mile’ entry.

Balloon payment

Also known as the guaranteed maximum final payment (GMFV), this is the forecasted value of the car at the end of the credit agreement. To own the car outright, this amount needs to be paid.

BIK, Benefit in Kind

If you receive a company car as part of your salary package, the BIK will be important. It’s a term used to reflect amount to be added to your salary to help you calculate the extra tax you’ll pay as a result of your company car benefit. It’s sometimes also referred to as ‘List Price’ and includes VAT, the price of any options, and the manufacturer’s delivery charge.

We look at this in more depth in our Guide to BIK Tax.

Blocked VAT

Limited companies can claim back 50% of the VAT on their finance rental – this is called Blocked VAT. It only applies to cars where drivers cover an element of private usage and refers to the total rental payable after VAT has been reclaimed.

CO2

These are the stated emissions from your car. CO2 emissions influence the amount of company car tax and Road Fund Licence payable on your lease car

CCA Consumer Credit Act 1974

This is the legal protection for individuals, unincorporated companies, and partnerships. Regulated Credit Agreements have a cooling off period during which they can be cancelled.

Commercial Use

This is a phrase that applies to business lease vehicles. When a car or van is classed as for ‘Commercial Use’ it often means that it can be driven by a number of different people. However, it must not be used for personal use.

Contract Hire

Where a business hires a vehicle for a specified period and makes regular payments. The organisation is not paying to buy or own the vehicle.

Find out more by reading our Guide to Business Contract Hire.

Contract Purchase

Similar to Contract Hire but at the end of the agreement, the company ‘hiring’ the vehicle can choose to buy it for an agreed amount. This is not an option available under standard Contract Hire.

Delivery Note

An important document which is signed when the customer takes delivery of a vehicle. The date of this Delivery Note normally signals the agreed beginning of the agreement. Payments then begin one month later.

Depreciation

Depreciation is the difference between the original price of a vehicle and how much it’ll be worth once the lease period ends.

Early Termination

If a customer decides to end the agreement before it was originally arranged, the Leasing company can charge a ‘Termination Fee’. In practical terms, this usually means the vehicle has to be returned and 50% of any outstanding payments paid.

Effective Rental

This reflects the true cost to a business of the monthly rental. ‘Effective Rental’ is the finance rental, plus 50% of the VAT, and the service/maintenance rental if applicable with no VAT (100% of VAT can be reclaimed from the Service Rental).

Excess mileage charge

At the beginning of your leasing contract, you’ll be asked to agree a mileage limit. If you exceed this limit during your rental period, you’ll normally have the pay an excess charge per mile. This mileage charge varies, depending on your agreement.

Fair wear and tear guide

This is an industry guide, issued by the BVRLA (British Vehicle Rental and Leasing Association is the trade body for companies engaged in the leasing and rental of cars and commercial vehicles), which defines fair wear and tear at the end of a lease.

Formal extension

When customers can ask for their lease contract to be extended by three months or more, this is called a Formal Extension. It is also referred to as the secondary period.

GAP Insurance

If your lease vehicle is written off during your hire period, G.A.P Insurance covers any shortfall between the insurance settlement and the value still outstanding by a Finance Company. Two main policy types exist; Finance GAP and Back to Invoice GAP. Finance GAP will pay out any insurance shortfall to the outstanding finance provider. Invoice GAP will settle the difference between the insurance settlement and the vehicle’s original purchase amount.

Informal extension

If a customer wants to extend their contract for a short period, but doesn’t want to be tied to a formal extension, this is called an Informal Extension.

Lease term

This is the length of time you’ll be hiring the vehicle to use and period of time you’re contracted to make your monthly payments.

Lessee

The lessee is the person or company leasing a vehicle from a dealer.

Lessor

The lessor is the company or dealer leasing the vehicle to a lessee.

Maintenance package (Also known as SMA – Service, Maintenance & Repair)

Maintenance packages can be included as part of your lease agreement. The cost is spread across your monthly payments and usually covers any servicing the vehicle requires, including: repairs, new parts, tyres, batteries and also exhausts.

Manufacturer’s list price

This is a basic price before any options are added, VAT or any discounts are applied.

Monthly payment

As it states, this is the agreed amount of money you to pay to the leasing company on a monthly basis. These fixed payments last until the end of the contract.

MRP

MRP stands for Manufacturers Recommended Price and is the agreed value of the vehicle at the end of the agreement. Tis figure is usually estimated at the beginning of an agreement.

P11D Value

This figure is the full price of the vehicle when new, plus the cost of any options and extras. This is the figure used by the Inland Revenue to help calculate tax.

Find out more by reading What is the P11D Value?

Personal use

If a vehicle is leased entirely for ‘personal use’, this means it can’t be used for business purposes. Plus, only the named driver is able to drive the vehicle.

You can find out more by reading our Guide to Personal Contract Hire.

Pence per mile (PPM)

This is an agreed amount that you agree to pay for every mile you drive in excess of the mileage limit you agreed at the beginning of your lease contract.

Relief vehicle

If this option is available and part of your lease contract, a ‘relief vehicle’ can be provided if your lease vehicle is off the road and you’re unable to use it.

Residual Value

Essentially the same as MRP, it’s the Lessor’s predicted value of the vehicle at the end of the lease agreement and affects how much you’ll pay each month to lease the vehicle. In practice, the higher the residual value, the lower the monthly payments.

Service Rental

This is the part of your Financial Rental agreement which covers the maintenance, relief vehicle and breakdown services, where included. For business users 100% of the VAT can be reclaimed from this element of the rental.

Terminal Pause

As part of your agreement, the number of rental payments is equal to the number of months of the agreement: if you have a 36 month agreement, you only pay 36 payments. So, when the finance provider asks for multiple rentals in advance, you will enjoy a payment holiday at the end of the agreement – the last three payments have already been made. This is often expressed as something like 3+33 = 36 payments in total.

Upfront costs

These are any costs you have to pay before entering into the leasing contract.

Vehicle Excise Duty (VED)

Formerly known as ‘road tax’, VED is the rate you pay to the UK Government to drive on UK roads. How much you pay is dependent on the CO2 emissions your car or van produces.

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