Flat rate PCP finance help

[mark88]

Went with my sister today to spec up a new car. The dealer put forward a PCP deal which all sounds good until you look at the figures more closely. I just can't work out how the interest is calculated. Here was the deal put forward:

Car cost(new mini): £16480

Deposit: £1500

Guaranteed value after 3yrs(baloon): £8686

35 monthly payments of £318. Interest rate 5.7% flat.

Now 35 x £318 = £11130

£11130 + £1500 + £8686 = £21316 !!

I know the value after 3 years would more than likely be more than 8686 but the part I don't get is this:

£1500 deposit means she is financing £14980, £8686 of which is the final monthly payment. During the first 35 months of the agreement she will be paying £318 month(£11130 total), by my reckoning that's £4836 in interest over 3 years. (£11130 - (£16480 - £1500 - £8686) = £4836)

So how is 5.7% flat rate of £14980 calculated? I just can't get the £4836 interest. What am I missing?

==============

She has about £9k from the sale of her current car and can afford about £180/month. Anyone help her out with a good deal?

[a3malawimatt]

You are also paying interest on the balloon. So in a way paying two lots of interest.

Matt

[shark_90]

I got stung on this "flat rate" bollocks too. 6% flat rate which turned out to be 14.9%APR.

It works out like this:

To put it very simply...... The 5% quoted is the FLAT rate of interest and the 10.1% is the APR. The flat rate of 5% means that for every £100 you borrow you pay back £5 in interest PER ANNUM. So in your case...borrowing 4k you will pay back £200 in interest for every year that you're borrowing the money...so if it was a 5 year term you'll be paying back an extra £1000 + any document or set up fees...usually upto about £250.

[Rustynuts]

Yeah, tell the fecker to p!ss off talking "Flat rate" and tell you what the apr is. That'll make him sit up and think.

[lottiefox]

Dealer PCPs are the equivalent of giving them the keys to your home and your PIN nimbers and letting them screw you over.

Drop a PM to Gareth on here - he did my finance through his company and has been used by a fair few Tsners and other forum members.

[wkrzys]

What is his company name if you dont mind me asking?

Looking at all finance options for my next car at the moment (to replace mine which was stolen >:|)

[Irnbrukid]

http://www.bespoke-auto.co.uk/

[Craigieboy]

When I worked in a bank I'd always have folk phoning about how they were offered a flat rate of 2-5%, but they'd never know to ask what the actual apr was so they could compare it to a loan. Although I've heard stories of dealers flapping when asked to explain the true costing.

[gizze]

The have offered you the equivilent of 14.7% apr.

Tell them to F Off!!

For £320 a month you want to be left with a balloon of no more than £6000 at the end. This would be 8.5% apr.

A flat rate is exactly that, a percentage of the amount borrowed.

So you pay a flat rate of 5%, or whatever it is, on the initial amount borrowed, so even after 25 months you are still paying 5% on the original amount.

Also if you want out early for any reason you will get stung, as it is all put on the front and you get a discount, which is down to the lenders discretion!!

So as you can see, with the flat rate you were offered you are borrowing £21k, if you need to get out after 10 months for any reason you will have paid off £318 x 10 = £3180 from the £21k borrowed, leaving £18k to clear the loan.

They will give you some discount but it will not be pleasant.

Speak to Gareth, he will get you into the right deal.

If you did £350 a month over 48 months you would owe nothing, you would own the car.

At 36 months you would only owe around £4k.

Guaranteed future values hardly ever work as you pay for them in interest rates anyway.

[mark88]

Bit lost, how can she be borrowing 21k? when the list price is £16480? Surely the amount borrowed is the purchase price less the deposit???

I just don't get how the amount of interest she would pay in total, £4836 relates to 5.7% of the amount borrowed at all.

[Rustynuts]

The interest is all added on as soon as you borrow the money. So you borrow whatever you need to buy the car, add the interest, and that figure is what you owe.

Regarding flat rate deals. I don't really understand how they work but I know enough to avoid them. APR was brought in so that Joe Public had a standard to compare all his finance deals against one another. The reason being that sneaky loan people were deriving complicated ways of working out high rates of interest with very low advertised interest rates, flat rates being one of them. If you don't understand how they work, all you need to look at is "How much am I borrowing, and how much do I have to pay back?" to give you an idea of whether it's a good deal or not. Your deal doesn't look good.

Easy answer for me. Take out a loan for the amount you need to borrow. You can get a loan for around about 7% apr. (I haven't checked) and negotiate a cash buying price with the right dealer for your car. As long as you don't say the loan is for a car then you're clear for if you want to sell the car. If the loan company know you want to purchase a car with their money they'll want it paid off if you sell the car. Maybe you're having a new kitchen put in at home?

[patently]

Every time I've bought a car privately, the dealer has talked me into hearing about the tempting rates they can offer if I finance the car.

Every time, I've looked at the printout, scanned down to the bottom where it says the total amount to be paid over the term of the loan, and thought "Tempting for who, exactly?"

[gizze]

[ QUOTE ]

Bit lost, how can she be borrowing 21k? when the list price is £16480? Surely the amount borrowed is the purchase price less the deposit???

I just don't get how the amount of interest she would pay in total, £4836 relates to 5.7% of the amount borrowed at all.

[/ QUOTE ]

Because it is a flat rate.

5.7% is the annual percentage rate paid on the total amount, each year.

Being a flat rate she is still paying the interest on the original amount borrowed even in year 3, hence the term flat rate, it doesn't change.

So lets say it was £100,000.

5.7% of £100,000 is £5,700 interest.

You pay that £5,700 every year you have the loan.

So if you have it over 4 years you pay 4 x £5700 = £22800 interest.

If you have a balloon of 50% you also have to pay off £50,000.

Now because it is a flat fee the only way it can be done is to look at the whole package, add the charges of £22,800 to the £50,000 and say you have to repay the £72,800 over 48 months.

Which works out at £1516.66 a month, with £50k owing on the 49th month.

Now if you see the full 48 months out that 5.7% flat will give you an apr equivalent of around 12% , if however you get out early the apr equivalent will be something completely different.

Say you want out after 10 months with the deal above.

Total cost of the loan including balloon, and interest charges is £122800, after 10 months you will have paid £1516.66 a month, so £15,166.

£122800 less the £15,166 paid leaves £107633 to clear the finance.

So you have a £100k car that is now worth £70k, you have paid £15k off it so you have to sell the car and find £38k more to get out of it!

Compare that to a balanced lease payment scheme.

£100k borrowed at 8% APR.

Because you pay off the capitol each month, and then get charged interest on teh remaining sum you are paying it off from day 1.

After 10 months you would owe £91k.

Far better than owing £107k.

Plus you can sell the car and settle the finance at any time.

I think you have got to be an abolute moron to take out any type of Flat rate finance, especially on a depreciating asset like a car, or anything where you may need to get out early.

Fair enough on a bank loan for a kitchen or an extension, but cars cars loose money on a funny curve, and as such it is the worst type of loan, but the dealers make the most money from it so they seem to be the one everyone falls into.

Edit: http://www.moneysavingexpert.com/loans/flat-rate-loan-danger

[962C]

[ QUOTE ]

She has about £9k from the sale of her current car and can afford about £180/month. Anyone help her out with a good deal?

[/ QUOTE ]

Buy a 9k used MINI. It is shocking to think how many people take the dealers finance agreement as above!

[gizze]

£16800 less £9000 deposit over 48 months is £179 at 8% apr.

[a3malawimatt]

I use balance payment system through my business to buy cars. Allows me to pretty much pay what ever i want for the first two years and then change the car. No front loaded interest or silly charges. Almost like a mortgage.

Matt

[mark88]

Gizze, I think you're misunderstanding me. I know how flat rate works. It's the fact that the sums don't add up in the deal the dealer put forward.

If she is borrowing £14980. 5.7% of this is £853.86

Times that by 3 years and it's £2561.58

So how then is the total amount payable £21316, £4836 more than purchase price, thus £4836 interest. It can't be 5.7% flat.

[mark88]

[ QUOTE ]

I use balance payment system through my business to buy cars. Allows me to pretty much pay what ever i want for the first two years and then change the car. No front loaded interest or silly charges. Almost like a mortgage.

Matt

[/ QUOTE ]

I have variable balanced payments on my car, but doesn't it only really come into use if you're borrowing over 25k?

[Merlot]

Dealers' often don't understand either. They often say, borrow at 3% flat on HP and put your money in the bank where you will get 5%. They don't remember that the money in the bank is being withdrawn over the term of the finance to make the payments so the actual interest earned is 2.5%, then there is tax to come off so its actually 2.0% or 1.5%; ie less than that being paid out.

[gizze]

[ QUOTE ]

I know how flat rate works. It's the fact that the sums don't add up in the deal the dealer put forward.

[/ QUOTE ]

No they don't add up mate. But then deals under £25k never tend to, they tell you what they like and hope you don't look into it.

[mark88]

[ QUOTE ]

Dealers' often don't understand either. They often say, borrow at 3% flat on HP and put your money in the bank where you will get 5%. They don't remember that the money in the bank is being withdrawn over the term of the finance to make the payments so the actual interest earned is 2.5%, then there is tax to come off so its actually 2.0% or 1.5%; ie less than that being paid out.

[/ QUOTE ]

This was pretty much how the deal was being sold. They say put in as little deposit as possible and put the excess cash you have in the bank. In our cause £1500 deposit meant she'd have £7k or so left over to 'offset'.

As you say, the problem is that 7k would partly be being used to pay off the monthly payments and also, if their quoted rate works out at 12-14%APR just what bank account is going to better that.

It's easy to see why people get suckered into these deals. All smoke and mirrors and it seems their quite popular. A dealer last week told us 80% of his customers used mini select finance(pcp)

[a3malawimatt]

[ QUOTE ]

[ QUOTE ]

I use balance payment system through my business to buy cars. Allows me to pretty much pay what ever i want for the first two years and then change the car. No front loaded interest or silly charges. Almost like a mortgage.

Matt

[/ QUOTE ]

I have variable balanced payments on my car, but doesn't it only really come into use if you're borrowing over 25k?

[/ QUOTE ]

Ah possibly, not sure.

Matt

[Gareth]

It's easy to see why people get suckered into these deals. All smoke and mirrors and it seems their quite popular. A dealer last week told us 80% of his customers used mini select finance(pcp)

Very true.

Dealership business managers always default to PCP as it is the most profitable finance product to sell...irrespective if it suits your circumstances or not

[Dave]

I think the other point too Gareth is that PCP puts people into cars they otherwise couldn't afford.

[patently]

... and ties them into a neverending story where the only sensible thing is to buy another one in three years time.