Asset Finance

Consumer Finance

Motor Finance

Glossary of Terms

Asset finance – a secured loan which allows businesses to purchase new plant, machinery and equipment

Balloon rental – made at a specified time, usually at the end of the primary period or lease period

Business Finance Code sets out the high standards that FLA members will meet when providing asset finance to businesses and the public sector

Business equipment finance – covers the finance of photocopiers, multifunctional devices, telecoms, vending machines, medical and other equipment

Capital allowances – tax allowances which owners of equipment claim against their taxable income. In leasing it is the lessor, rather than the lessee, who claims capital allowances

Consumer finance includes just about any type of lending activity that results in the extension of credit to a consumer

Contract hire – a finance agreement where an asset is hired, usually for a fixed term of two or three years, rather than for the life of the asset

Credit cards and store cards – offer consumers a very flexible and convenient way of accessing credit, with the option to pay the lender back immediately or over time. Store cards are a type of credit card that can be used only in one store or chain

Depreciation –the deterioration of an asset over its useful life and an annual write off used for accounting purposes. Capital allowances represent depreciation for tax purposes, but are subject to different treatment from accounting depreciation

Finance lease – the risks and rewards incidental to the ownership of the leased asset are transferred to lessee, but not the actual ownership

Hire Purchase (HP) –a hire agreement which gives the customer the option of owning the asset at the end of the agreement. These are normally fixed cost, meaning that the APR (Annual Percentage Rate) is set before the contract begins. The loan period is also fixed and secured against the asset, which means that lenders can be flexible in the terms and conditions they offer. Customers are the ‘registered keeper’ of the asset and responsible for insuring and maintaining it, but the finance company remains the legal owner until the amount borrowed has been fully repaid. Once the final payment is made, ownership transfers to the customer

Lease – a contract by which one party allows use of an asset to another for a specified time, usually in return for a periodic payment

Leasing – where a company buys and owns an asset under a commercial agreement. The customer then hires the asset, paying rental over a fixed period. At the end of the contract, the customer usually has a choice of extending the lease, buying the asset or simply returning it

Lending Code – the FLA Lending Code sets out best practice in consumer lending and must be signed by the Chief Executives of full members when they join the association

Lessee – a person who is granted a lease allowing them to rent a property or asset for a specified time

Lessor – is a person or company who grants a lease for use of an asset in exchange for periodic payment

Lobbying – seeking to influence government on a specific issue

Motor finance obtained through a car dealership to allow a customer to purchase a new or used car. This can be a lease deal, Personal Contract Purchase, Hire Purchase or an unsecured loan from the dealer. Under most motor finance deals, the finance company will own the car until the last payment is made. The secured nature of the agreement allows motor finance companies to offer good deals on finance

Operating lease a lease that runs for less than the full economic life of the asset. The customer is not liable for the financing of its full value and commonly uses it to acquire equipment on a relatively short-term basis. This type of lease is often used when the asset is likely to have a resale value, for example, aircraft and vehicles. Operating leases are particularly attractive to companies that frequently update or replace equipment

PCP – Personal Contract Purchase is a variation of a Hire Purchase agreement. The key difference is that the value of the car at the end of the contract is calculated at the start of the agreement and referred to as the Guaranteed Minimum Future Value (GMFV). This is based on a number of factors including how old the car will be at the end of the agreement and how many miles it is expected to have covered. Deferring the GMFV to the end of the agreement means that regular monthly payments are lower than those on a comparable HP agreement over the same term. A PCP agreement also gives you the flexibility to decide whether you would like to own the car outright at the end of the agreement by paying the deferred value (GMFV), or returning the car to the lender and entering into a new car finance agreement

Personal loans –unsecured lending

Primary period – The initial period of a lease, commonly less than the normal working life of the asset, during which the finance company expects to recover the cost of depreciation of the asset, their money costs and their profit

Residual value – The amount initially estimated by the finance company as the expected sale proceeds which do not need to be recovered by way of rentals

SAF – Specialist Automotive Finance. This was introduced by the FLA in 2007 to raise professional standards and improve the knowledge of dealership staff involved in the sale of motor finance products. Over 30,000 staff take the test each year

SAF Advanced – Also known as the Certificate for Automotive Finance Specialists (CertoAutoFS), SAF Advanced is a Level 3 qualification launched by the FLA and the London Institute of Banking & Finance in 2015

Sale proceeds – the value a finance company recovers when they have disposed of an asset or equipment at the end of a lease period

Second charge mortgage – a type of lending that is secured on a customer’s property at the same time as a main mortgage

Secondary period – when a lease is extended beyond the primary period by an agreement between the finance company and the customer. Rentals during a secondary period are generally at a reduced rate

Secured lending – finance secured against an asset, for example a car. The asset provides collateral for the finance provider should the customer become unable to make the agreed repayments. The finance provider may recover the asset and sell it to regain some of their losses, although this is always seen as the last option. The benefit of secured finance for customers is that, because of the reduced risks, lenders are able to offer more flexible terms and conditions

Secured loans – personal loans where the lender has some rights over the customer’s assets if the loan is not repaid. An example is a second charge mortgage

Store instalment credit –  typically used to purchase electrical goods, furniture and furnishings. Payments are usually monthly, and may be interest-free or follow a deferred start

Unsecured loans –  personal loans where the lender does not have any rights over the customer’s assets