New research by AA Car Finance indicates that nearly seven in ten drivers (69%) face challenges understanding at least one term related to car finance.
The study sheds light on the confusion surrounding car finance, which encompasses various payment options and can be particularly perplexing for those new to purchasing a car through this method.
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The term causing the most confusion is ‘balloon payment,’ with 69% of individuals finding it puzzling. A balloon payment refers to a lump sum owed to a lender at the end of a car finance agreement, commonly associated with Personal Contract Purchase (PCP) deals.
Surprisingly, 44% of drivers are unfamiliar with the term PCP, despite it being one of the most prevalent car finance options. PCP deals involve fixed monthly instalments, considering the depreciation of the vehicle over the contract’s duration. At the contract’s end, the driver can make a final balloon payment to own the vehicle outright or opt for a new one.
The research reveals that other terms causing confusion include Loan to Value (LTV), where 57% of respondents are unable to explain the concept. LTV is the amount borrowed divided by the value of the desired car. Additionally, a fifth of drivers are unclear about guarantor loans, wherein a friend or family member agrees to cover payments if necessary.
However, more straightforward terms such as car leasing and personal loans are well understood by over nine in ten people (92%).
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By GlobalDataIn a separate analysis by AA Car Finance, one in six drivers (16%) plans to turn to car finance for purchasing a new or used vehicle in 2024.
Mark Attwell, Director at AA Car Finance, acknowledges the complexity of the car finance landscape, particularly for those new to it. He said: “As monthly payment plans grow more popular, it’s crucial that car lending providers offer clear and comprehensive information to customers, which demystifies any confusing jargon. This will enable them to make informed decisions and feel confident in committing to a finance-backed purchase.”
Yonder was commissioned by AA Car Finance to undertake an online survey, for which it gathered responses from 11,983 UK adults aged 18-65+ from January 11 to January 23, 2024.
