What does ’arrears’ mean in car finance?

In car finance, 'arrears' means you're behind on your repayments. If you miss a scheduled payment, you're considered in arrears until it’s made up, which can affect your credit score and incur penalties.

What is an early settlement in car finance?

Early settlement means paying off your car finance agreement before the end of the contract term. This includes the remaining balance, any interest due, and may involve an early repayment fee.

What is a voluntary termination (VT) in car finance?

Voluntary termination lets you end your agreement early if you’ve repaid at least 50% of the total amount. You return the car in good condition with no need to pay the remaining balance, subject to wear and tear.

What does ’total amount payable’ mean?

The total amount payable is the full cost of the car finance agreement, including the loan amount, interest, and any fees. It reflects how much you will pay in total over the loan term.

What is the difference between a deposit and an overpayment?

A deposit is the initial payment made at the start of your agreement to reduce the loan amount. An overpayment is an additional amount paid after the agreement begins, which can lower the total loan faster and reduce interest costs.

Understanding your car finance agreement: terms and conditions explained

Written by Louise Haines Updated 11 Aug 2025

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Like any contract, it’s crucial to read through your car finance terms and conditions carefully before you sign your agreement. But we know some of the financial and legal jargon can be a little difficult to understand if you haven’t come across it before!

It’s important you understand these terms, because they outline your rights and obligations throughout your loan term. So, we’ve broken down some of the most common terms you may see in your car finance contract.

Arrears

If you fall behind on your payments, you’ll be in arrears. For example, if your monthly payment is due on the 1st of the month, and you miss this payment, you are in arrears until you make the payment.

If you’re in arrears, it could lead to penalties or additional interest charges. It can also affect your credit score, which could make it harder to get finance in the future.

Balance

‘Balance’ means the amount of money you still owe on your car finance agreement. It includes any unpaid money, and the interest. Over time, as you make payments, the balance will decrease. If you want to get your balance down to zero faster, you may be able to make extra payments, but this could come with early settlement fees so it’s best to check with your lender first.

Charges

Charges are extra costs you’ve incurred on your loan. They can come in many forms within a car finance agreement, including late payment fees, early settlement fees, or excess mileage charges on a PCP agreement. These charges are added to the amount you owe.

Credit Agreement

A credit agreement is the legal contract that outlines the terms and conditions of your car finance deal. It includes details such as the loan amount, interest rates, repayment schedule, and any penalties for not following the agreement. It’s legally binding and signed by both you and the lender.

Default

A default is when you fail to meet the terms of your credit agreement, usually by missing multiple payments. Defaulting can lead to serious consequences, including the lender taking legal action to recover the debt, or even repossessing your car. It can also severely damage your credit score.

Deposit

A deposit is the upfront payment you make at the start of your car finance agreement. This is usually a percentage of the car’s value, and it reduces the total amount you need to finance. The deposit amount is typically paid at the beginning of the contract. If you pay a bigger deposit, you may have more car finance options and pay a lower interest rate, which could reduce the total amount you pay over your agreement.

At Car Finance 247, we also offer no deposit car finance deals for those who can’t afford an upfront payment.

Early Settlement

Early settlement refers to paying off your car finance agreement early. If you want to do this, you’ll need to request an early settlement figure from your lender. This will include the remaining balance on your finance, any interest still due, and a potential early repayment charge. If you’re in a PCP agreement, it also includes the balloon payment.

Please note: early settlement may incur a charge depending on the terms of your agreement. Always check the terms before making early repayment.

Fees

Fees are another word for charges. You may encounter various fees throughout your loan term. These can include set-up fees, late payment fees, or charges for returning the car in poor condition or exceeding the agreed mileage. It's essential to understand all possible fees before signing your agreement.

Total Amount Payable

The total amount payable is the total sum of money you will pay over the course of your agreement. This includes the original loan amount, interest, and any additional fees or charges. It’s important to check this figure, as it tells you how much the car will cost you in total by the time you finish your payments.

Overpayment

An overpayment happens when you pay more than the scheduled monthly payment. Overpaying can reduce your loan balance faster, meaning you might pay less interest in the long run. But, some agreements may limit how much you can overpay without facing penalties, so always check the terms of your contract.

Voluntary Termination (VT)

Voluntary Termination (VT) lets you end your car finance agreement early. You can only do this if you’ve paid at least 50% of the total amount due, including interest and fees. You can return the car without needing to pay the remaining balance, but only if it's in good condition and meets your lender’s fair wear and tear guidelines.

Important: If you choose to voluntarily terminate your agreement, the car is still owned by the lender and must be returned. You cannot keep or sell the car at this point.

Now you know some common car finance terms, you’ll be better able to understand the terms and conditions of your car finance agreement. It's important that you are aware of what’s expected from you to avoid any unnecessary charges, and to find out what your options are if your circumstances have changed.

Always take the time to read the fine print and, if necessary, seek advice to avoid any unexpected costs.

Disclaimer: The information provided in this blog is for general guidance only and should not be considered as financial advice. Always seek professional advice from your finance provider or an independent expert before making any decisions regarding your car finance agreement. Car Finance 247 is not responsible for any decisions made based on the information provided. Terms and conditions may vary depending on the lender and the specific finance agreement.