Asset finance can be a complex world filled with confusing terms and jargon that can leave you scratching your head. From APR to balloon payments, understanding asset finance’s various terms and acronyms is essential for making informed decisions.
In this blog post, we’ll unravel the mystery behind asset finance jargon and provide a comprehensive guide to understanding the language of asset financing. So, let’s dive in and make sense of the asset finance maze!
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
A
Administration Fee
Charged at the start of the finance agreement, this fee covers the lender’s administrative cost. Such as setting up the finance and issuing relevant documentation.
Agreement Term
The agreed period of time in which you have agreed to repay the finance.
Amortisation
An asset’s value is reduced to reflect its reduced worth over time. Amortising an asset transfers all or part of its value from the balance sheet to the profit and loss account, where it reduces taxable income. Amortisation can also refer to reducing debt by periodic repayments of the capital and interest, Also known as depreciation.
Amount of Credit
This is the full amount that you are borrowing, excluding any fees.
APR (Annual Percentage Rate)
It is the total cost of borrowing, expressed as a yearly interest rate. It includes the interest rate and any additional fees and charges associated with the loan. The APR helps you compare different loan offers and understand the overall cost of financing an asset.
Approved In Principle
The lender has assessed your asset finance application and tentatively agreed to provide the loan, pending verification of the information you provided. It’s not a final approval, but a conditional acceptance subject to further checks.
Asset-Based Lending
It is a funding solution that uses physical assets (such as equipment) and intangible assets (such as IP) as security against lending.
Asset lifecycle
Refers to the stages an asset goes through from its initial acquisition to its eventual disposal. It encompasses the entire span of an asset’s existence within an organisation, covering its planning, acquisition, utilisation, maintenance, and retirement.
B
Balance
The amount that you intend to finance. The price of the asset you are buying minus the upfront deposit that you are putting down. During the finance agreement it refers to the amount left that you have to pay.
Balance Sheet
States a business’s assets, liabilities, and shareholder’s equity at a specific time.
Balloon Payment
A large lump sum payment due at the end of certain financing agreements. It allows you to have lower monthly payments throughout the loan term. Still, you’ll need to make the final large payment to own the asset fully or consider refinancing the remaining balance. This figure is worked out and agreed at the start of the agreement.
Bank Liquidity
A companies ability to quickly access cash or liquid assets to cover its short-term financial obligations. It reflects the company’s readiness to meet expenses like payroll, bills, and operational costs without jeopardising its daily operations. Strong bank liquidity ensures a company can navigate unexpected financial challenges and maintain its financial stability.
Base rate
The rate set by the Bank of England every month and used as the basis for setting loan rates.
C
Capital Allowances
Tax deductions that businesses can claim on certain types of capital expenditure. These expenditures are incurred when a company buys assets like machinery, equipment, vehicles, or property for business use. Instead of deducting the entire cost of these assets from their profits in one go, businesses can claim capital allowances over time. This system reduces their taxable profits, thereby lowering their tax liability. Capital allowances encourage businesses to invest in assets that contribute to their operations while providing a financial incentive through reduced tax burdens.
Capital Balance
Refers to the outstanding amount of the loan you still owe to the lender. It represents the remaining principal amount that you need to repay over the loan term.
Cash Flow
The net amount of cash and cash equivalents being transferred into and out of a business.
Consumer Credit Directive (CCD)
This is an EU directive designed to ensure transparency and high levels of customer protection when buying on credit.
Cooling-Off Period
As a consumer, you have a period of 14 days to reject and withdraw from any finance agreement under the Consumer Credit Directive,
Credit Score
Your credit score is based on your past credit history and existing debt and will help lenders decide what rate to offer you. You can read up more on What Is a Credit Score.
D
Debt to Equity Ratio
A financial metric that indicates the proportion of a company’s total debt in relation to its equity. It’s calculated by dividing the company’s total debt by its total equity. This ratio provides insights into how a company finances its operations – whether it relies more on borrowed funds (debt) or its shareholders’ investments (equity).
Deposit
This is the initial payment you put down towards the car at the start of the finance agreement. The larger your deposit, the lower your monthly payments, and the more likely you’ll be accepted.
Depreciation
Refers to the decrease in the value of your car over time. It is a natural and inevitable occurrence that affects all vehicles. Understanding the rate of depreciation is important because it can impact the resale value of your car and potentially affect your loan or lease agreement.
Directors Guarantee
In some instances, a leasing company will require that its directors give their personal guarantee to approve funding.
Disposal Plan
A document that clearly defines how an asset should be retired or disposed of at the end of their working life.
Documentation Fee
Not all agreements have a documentation fee, but sometimes there’s a fee to process the paperwork for your car finance agreement.
E
Early Settlement
Paying off the outstanding loan amount before the agreed-upon term ends. This can be done to clear the debt sooner or to take advantage of potential cost savings on interest.
Equity
Equity represents the difference between the current market value of the asset and the amount you owe on the loan.
You have positive equity if the market value is higher than the loan balance. Negative equity occurs when the amount you owe on the loan is higher than the asset’s current market value. This situation can arise if the asset’s value depreciates rapidly or you financed the asset with a small down payment.
F
Fair Market Value
The estimated price at which an asset would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.
FCA
This refers to the Financial Conduct Authority who are an independent body that regulates financial services in the UK.
Fixed Assets
Assets purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
Fixed-Rate Interest
The term is used to describe an Interest Rate that remains the same throughout your contract.
Flat Rate
This is the rate of interest that is charged for taking out finance. With flat rate interest, the rate will stay the same for the duration of the finance agreement.
G
GAP Insurance
GAP insurance, also known as Guaranteed Asset Protection insurance, is an optional coverage that helps cover the difference (or gap) between the amount you owe on the asset and the actual cash value of the asset in case of theft or total loss. It provides financial protection and ensures you’re not left with a significant loan balance to repay.
Guaranteed Future Value (GFV)
This represents the estimated value of the asset at the end of the finance agreement, taking into account fair wear and tear. Your car could fall below the guaranteed future value if the asset has had any major issues.
H
Hire Purchase (HP)
A popular choice of car finance if you are looking to own the car at the end of the finance agreement. It involves an upfront deposit and equal monthly instalments. Read our post on What Is Hire Purchase Asset Finance for more information.
I
Instalment
Regular and scheduled payments made to repay the loan for the vehicle. These payments are typically made monthly and include both the principal amount borrowed and any applicable interest charges.
Interest Rate
Percentage of the loan amount that you will pay as an additional charge to the lender. It is the cost of borrowing money and is applied to the outstanding loan balance over the loan term.
J
Joint Application
A finance application taken out by two or more people. This can sometime be the case if two people combine there affordability in order to get a higher priced car. It is also common if the owners will both be sharing use of the car and want to have joint ownership. Together, they are responsible for repaying the loan or finance agreement.
L
Late Charge
Fee imposed by the lender when the borrower fails to make the scheduled loan payment by the due date. It is a penalty for late payment and is added to the outstanding balance.
Lease
An agreement where a finance company buys a business asset on behalf of your company and then rents it out to you. You make monthly payments until you cover the cost of the equipment, plus interest.
Lessee
A lessee is a person who rents land or property, such as plant machinery.
Lessor
The owner of an asset that is leased, or rented, to another party, is known as the lessee.
Leverage Ratio
A financial metric that assesses the proportion of a company’s debt in relation to its equity and total assets. It’s calculated by dividing the company’s total debt by its equity or total assets. The leverage ratio provides insights into the company’s level of financial risk and the extent to which it relies on debt financing.
Liability
Refers to the financial obligations or debts a business or individual owes to another party. In asset finance, liability can arise from lease agreements or loans used to acquire assets. It represents the amount that needs to be repaid to the lessor or lender over time, often with interest.
Lifecycle Cost
The total cost associated with an asset throughout its entire lifespan, from acquisition to disposal. It includes the initial purchase price and expenses such as installation, maintenance, repairs, operating costs, and eventual disposal costs.
M
Max Lend
The maximum amount of money that a lender is willing to provide as a loan to finance the purchase of an asset. It represents the upper limit of the loan amount available to the borrower based on their creditworthiness and the value of the asset being financed.
Mileage Allowance
Maximum number of miles you are allowed to drive a leased vehicle without incurring additional charges or penalties. It is typically specified in lease agreements to protect the car’s value and account for wear and tear.
N
Negative Equity
Negative equity occurs when the amount you owe on your loan is higher than the asset’s current market value. This situation can arise if the asset’s value depreciates rapidly or you financed the asset with a small down payment.
O
Off-Balance Sheet Financing
A financial arrangement where certain assets, liabilities, or activities are not included on a company’s balance sheet. This can be done legally through various methods, such as joint ventures, leasing, or special purpose entities. Often used to manage risk, improve financial ratios, or facilitate specific transactions, but it’s important to note that it can also obscure a company’s true financial position.
Option To Purchase Fee (OTP)
This is a charge imposed by some lenders at the end of an asset lease. It is a fee paid by you if you decide to exercise your option to purchase the leased asset at the end of the lease term. This fee is typically a fixed amount and is outlined in the lease agreement. You can choose to pay the fee and buy the asset, or you can return the asset to the leasing company.
R
Refinance
A financial solution that enables businesses to raise capital by leveraging the value of their existing assets. This form of funding allows companies to use their assets, such as machinery, equipment, vehicles, or even property, as collateral to secure a loan or other financing options.
Read our post on What Is Asset Refinancing for more information.
Representative APR
It is a standardised way of representing the interest rate and other associated costs of asset finance offer over the course of one year. The representative APR takes into account not only the interest charged on the loan but also any additional fees or charges that the borrower may incur.
It is called “representative” because it is the rate that the lender uses to showcase the typical APR offered to a majority of customers who qualify for the financing. However, it’s essential to note that individual APRs may vary based on the borrower’s creditworthiness and other factors. The representative APR provides a helpful way for consumers to compare different finance offers from various lenders to understand the overall cost of borrowing.
Residual Value
This refers to the resale value of the asset at the end of the agreement. The estimated residual value of the asset is calculated by the lender at the start of the agreement and is a key factor in determining the cost of the Monthly Payments.
Residual Value-Based Lease
The lessor (the entity providing the asset) estimates the asset’s future value at the end of the lease term. This estimated value is called the residual value. The lessee (the entity leasing the asset) then makes lease payments based on the difference between the asset’s initial and estimated residual values.
At the end of the lease term, if the actual market value of the asset is higher than the estimated residual value, the lessor benefits. If the market value is lower, the lessee may benefit by purchasing the asset at a price lower than its market value. Residual value-based leases are commonly used for assets that are expected to retain significant value after the lease period, such as certain types of vehicles or equipment.
S
Service, Maintenance and Repair
Usually an integral component of vehicle leasing, it covers the regular servicing, maintenance and repair of the leased asset to help ensure it can deliver the expected level of service until it is replaced.
Soft Search
A credit search which doesn’t leave a trace on your credit file. It’s used to give finance companies an indication of risk and to decide how much they can offer you.
T
Term
This is simply the length of time you will agree to pay off your finance agreement.
V
Variable Rate
Unlike a fixed rate, a variable rate will change based on fluctuations in the market.
W
Warranty
A contract between the manufacturer or dealer and the asset owner, providing coverage for certain repairs or replacements of parts for a specified period or mileage limit. It aims to protect the owner from financial burdens related to unexpected mechanical failures or defects during the warranty period.
Wear And Tear
The normal deterioration or damage that occurs to an asset over time due to regular use. It includes minor damages and cosmetic issues that can be expected as a result of using the asset. Wear and tear is distinct from damages caused by accidents or neglect.
Whole Life Costs
Also known as lifecycle costs, refer to the total cost of owning, operating, and maintaining an asset throughout its entire lifespan. This cost calculation considers the initial purchase or acquisition cost and ongoing expenses such as maintenance, repairs, operating costs, and even disposal costs.
Working Capital
The capital of a business used in its day-to-day trading operations. It is calculated as the current assets minus the current liabilities.
Write-Off
Also known as a total loss, occurs when a vehicle is damaged or involved in an accident to the extent that it is deemed uneconomical or unsafe to repair by the insurance company. In such cases, the cost of repairing the car exceeds its current market value or a predetermined threshold set by the insurance company.
Get in touch if there are any terms that you think we have missed. We would be more than happy to help you through the confusing world of car finance.
info@dorsiafinance.co.uk | 01522 420 420
