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daemon

10,859 posts

82 months

[news] 
Saturday 6th March 2010 quote quote all
sidicks said:
daemon said:
I did repeatedly produce a counter arguement at the time, and you blindly refused to acknowledge it time and time again - much like you're doing again.

APR is an expression of the loan + the interest paid used for comparative purposes.

I dont understand how you can think that using this formula is a 'simple' way for people to calculate their payments?
I didn't think we are talking about whether it's a simple way of calculating it or not, the point is that:
a) you don't need to know the flat rate to do the calculation
b) the APR is a useful piece of information, whereas the flat rate is meaningless as it takes no account of the timing of cashflows, as my examples above show.

Sidicks

daemon said:
And, yes, you sound like the sort of guy who makes a point of putting FIA after his name wink
Sorry, is it too late to take that comment back?
beer
Sidicks
OK, i'll forgive you for the FIA crack... smile


sidicks

5,539 posts

106 months

[news] 
Saturday 6th March 2010 quote quote all
Manks said:
What previous post? What different loan options? Must have missed that one. If you mean are the quotes on my desk different types of loan then yes they are. They have similar APRs but they are not economically similar. The one with the lowest payments is in faact the worst deal for most people.
This one:
sidicks said:
Ok, here is an example:

£10k loan, payable in 3 ways:
a) monthly in arrears over 3 years at £319.44
b) with a payment of £9,999 after 1 day and a final payment of £1,501 at the end of 3 years
c) with a payment of £11,500 after 3 years

For the avoidance of doubt, these all have a flat rate of 5%,

The APR's are approximately:
a) 9.7%
b) 250%
c) 4.77%

I know which loan is the best value, but it seems you'd be indifferent between the 3....

Put it another way, I'll lend you £10,000 under arrangement b) and you can lend me £10,000 under arrangement c). As they are both 5% Flat rate, that's a fair deal, right???
:-)
manks said:
This is because if they wanted to take advantage of the one month interest and exit facility they would have begative equity to cover in all probability.
This is nothing to do with interest rates, it is to do with the structure of the loan. I accept that PCPs may not be the best way to buy a loan, but it is an absolute fact that the lower APR represents the best economic deal.
In practice there might be good reasons for choosing a different deal, but looking purely at the size and timing of payments, the lower APR is always the best economic deal even if the total charges fr credit are higher.


manks said:
I will say this once more because you don't seem to be getting the point. APR is a crude measure designed to make it easier for Joe public to compare loans. Outside of that it is of little use and you most definitely cannot calculate loan repayments from it.
I will say this once more because you don't seem to be getting the point - the APR represents the true cost of the loan and is therefore the only objective measure of assessing the true economic cost of the loan, because it takes into account the amount AND TIMING of payments.


manks said:
And by the way, if you have FIA after your name why is it that you don't understand how PCPs work?

Manks
I know exactly how they work - this is a discussion about APR v Flat rate.

You still refuse to accept what the APR actual means!

When are we going to swap loans??!!
smile
Sidicks

sidicks

5,539 posts

106 months

[news] 
Saturday 6th March 2010 quote quote all
daemon said:
OK, i'll forgive you for the FIA crack... smile
beer
Sidicks

Manks

Original Poster:

7,546 posts

107 months

[news] 
Saturday 6th March 2010 quote quote all
sidicks said:
I know exactly how they [PCPs] work - this is a discussion about APR v Flat rate.

Sidicks
Well apparently not.

On page 1 of this thread, we had the following exchange:

Manks: I have now found out the reason why PCP works out the way it does and it is this:

There is a flat rate at that is applied to the repayment element of the loan AND the balloon. But then the same rate is applied to the balloon again.

So, the repayment element of the loan carries a true interest rate of approximately twice the flat rate (because the capital is decreasing but the payments aren't). The bubble carries twice the flat rate.

Sidicks: I'm afraid that is rubbish. That is not how it works, but maybe that's how it was described to you!

Manks: The PCP lenders (as far as I have seen anyway) don't make it clear that they are actually charging interest twice on the bubble. But that's what they are doing. Basically they are deriving interest on the loan and a yield on the balloon, one of which is about double the flat rate and one of which is double the flat rate.

Sidicks: Wrong!

I then provided you a link to the OFT website which confirms that PCP works exactly as I explained it. Thus demonstrating that you don't (or at least you didn't yesterday) know how PCP works.

This isn't a thread about flat rate it is about how PCP works. We have been dragged off topic by a discussion about APR because a couple of people didn't understand the question and think that APR is the cure all for everthing including the common cold. Which it isn't.

Now, it's time to open a bottle of wine.

Manks wink



sidicks

5,539 posts

106 months

[news] 
Sunday 7th March 2010 quote quote all
Manks - did you enjoy your wine?!
smile

How a PCP works?
A PCP works by deferring part of the total cost of a car until a later date. The borrower pays off part of the finance on a regular basis, typically monthly throughout the period of the finance and then needs to pay a lump sum to complete the finance deal. Normally this lump sum acts as a guaranteed minimum value for the car.

That is how a PCP works - i think we agree on that!!

Approximate pricing methodology
The approach you have set out effectively uses the 'wrong' number twice to end up with the 'right' result!

As we all know, for a normal loan, the APR (the true cost) is roughly twice the flat rate (as over the period, the outstanding balance is roughly half of the initial loan).

The approach on the OFT website that you linked to applies a flat rate of interest to a reducing loan, so this ignores the timing of repayments. The flat rate is the 'wrong' number (compared with the real cost of interest).

Similarly on the deferred value, the 'correct' value is a compound rate not a simple rate, but as there is no reducing balance these are broadly similar. Therefore using twice the flat rate is also the 'wrong' number to apply (compared with the real cost of interest).

Effectively using simple interest in this way means that, in an era before computers, given the appropriate simple formulae and a basic calculator, a car finance chap could easily produce quotes on a number of different bases.

i.e. the point I was trying to make (badly) is that the calculation methodology described above doesn't make economic sense in terms of the actual payments and the timing of them, but as APR is approximately twice flat rate, you get to the right result!

The APR is the 'right' rate!!
smile
Sidicks

PS - Do you yet accept that in no way is an APR a 'crude' measure?!
PPS - Are we going to swap loans?



Edited by sidicks on Sunday 7th March 09:33

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Manks

Original Poster:

7,546 posts

107 months

[news] 
Sunday 7th March 2010 quote quote all
sidicks said:
Manks - did you enjoy your wine?!
smile

How a PCP works?
A PCP works by deferring part of the total cost of a car until a later date. The borrower pays off part of the finance on a regular basis, typically monthly throughout the period of the finance and then needs to pay a lump sum to complete the finance deal. Normally this lump sum acts as a guaranteed minimum value for the car.

That is how a PCP works - i think we agree on that!!

Approximate pricing methodology
The approach you have set out effectively uses the 'wrong' number twice to end up with the 'right' result!

As we all know, for a normal loan, the APR (the true cost) is roughly twice the flat rate (as over the period, the outstanding balance is roughly half of the initial loan).

The approach on the OFT website that you linked to applies a flat rate of interest to a reducing loan, so this ignores the timing of repayments. The flat rate is the 'wrong' number (compared with the real cost of interest).

Similarly on the deferred value, the 'correct' value is a compound rate not a simple rate, but as there is no reducing balance these are broadly similar. Therefore using twice the flat rate is also the 'wrong' number to apply (compared with the real cost of interest).

Effectively using simple interest in this way means that, in an era before computers, given the appropriate simple formulae and a basic calculator, a car finance chap could easily produce quotes on a number of different bases.

i.e. the point I was trying to make (badly) is that the calculation methodology described above doesn't make economic sense in terms of the actual payments and the timing of them, but as APR is approximately twice flat rate, you get to the right result!

The APR is the 'right' rate!!
smile
Sidicks

PS - Do you yet accept that in no way is an APR a 'crude' measure?!
PPS - Are we going to swap loans?



Edited by sidicks on Sunday 7th March 09:33
Sidicks

Wine was fine thank you. Cava actually, turned it into cocktails.

As for your argument above, you are still trying to suggest that black is white. The Office Of Fair trading, I strongly suspect, can be relied upon to know how PCP deals are structured. The link I provided to their site gives a full explanation which I feel sure is correct. You, on the other hand, have demonstrated that you definitely don't understand how it works, dismissing what the OFT says as "nonsense". I prefer their credentials to yours.

To suggest that I am using the wrong rate twice is simply ridiculous Sidicks and you know it. You have demonstrated earlier in the thread that you've got it wrong because someone has fed the numbers into a PCP calculator and the answer is different from yours.

APR is calculated AFTER base rate has been used to perform a calculation and other factors are incorporated. It is then rounded down unless it is a whole number. For this reason you cannnot then input it in a reverse calculation and expect to get an accurate answer.

With the greatest respect I think you know you are wrong but simply won't admit it.

Manks






johnfm

10,832 posts

135 months

[news] 
Sunday 7th March 2010 quote quote all
Dear Ladies

APR is calculated by assessing the cash flows of the proposed repayments.

The ONLY way to calculate APR is to calculate the IRR of a series of cashflows adn, from that, calculate the APR.


All car deals, whether CH, PCP, or ECO have a raft of charges, admin fees, inflated balloons etc that generate profit for the leasing company - as there would be no point supplying the car otherwise.

The APR figures that suppliers must disclose on a regulated agreement must include admin fees and even maintenance fees IF the maintenance contract is compulsory (barmy, hey!).

Without knowing the quantum of admin fees and when they are charged (ie start of contract or end of contract) you will be pissing in the wind.

Just ask the PCP supplier for a breakdown of the calculations. Simple(s).

sidicks

5,539 posts

106 months

[news] 
Sunday 7th March 2010 quote quote all
What I am saying is that how they calculate the PCP premiums may well be on the basis you have supplied, but that is a 'nonsense' calculation as the interest rate used is a simple flat rate which therefore takes no account of the timing of cashflows.

In economic terms, a PCP does not charge double interest on the deferred amount (that is misleading as it implies that in some way PCPs are a rip off).

What we are actually saying is that the interest rate quoted as being charged on the deferred amount is roughly half of the true rate, so you need to double it to get the right answer.

I.e there is a significant difference between the calculation that us being done and what is actually happening from an economic perspective!

Sidicks

johnfm

10,832 posts

135 months

[news] 
Sunday 7th March 2010 quote quote all
It is pretty simple to model really.

amount borrowed
initial payment
start of contract admin fees
number of payments
regular payment value
balloon payment
end of contract admin fees

create a column of the 'n' monthly payments.

Calculate the IRR on those payments using the IRR command in excel
Calcualate the APR using the IRR in the step above.

Then play with the various figures to see how much effect small changes in, say EOC admin fees can have on APR

johnfm

10,832 posts

135 months

[news] 
Sunday 7th March 2010 quote quote all
Amount of loan 10000
admin fees 0
deposit 1000
monthly pmt 180
balloon 5000
eoc fees 0
interest rate 5%
no opf payments 36



total repaid 11480
total interest 1480


rough monthly pmt £170.69

IRR 0.818680680063%
APR 10.28

Manks

Original Poster:

7,546 posts

107 months

[news] 
Sunday 7th March 2010 quote quote all
sidicks said:
What I am saying is that how they calculate the PCP premiums may well be on the basis you have supplied,
Hellelujah.

sidicks said:
but that is a 'nonsense' calculation as the interest rate used is a simple flat rate which therefore takes no account of the timing of cashflows.
It don't matter Sidicks. That's how it works. If PCP providers decide to multiply their payments by a fixed random figure, that is how it works. If they will only use odd numbers, that is how it works. Quotes only on Thurdays? That's how it works. My question was "[can someone explain] PCP calculation. You couldn't. But the ensuing argument has nonetheless been entertaining.

sidicks said:
In economic terms, a PCP does not charge double interest on the deferred amount (that is misleading as it implies that in some way PCPs are a rip off).
What do you mean in economic terms? PCP does charge interest twice on the bubble - go and read the OFT site again.

sidicks said:
What we are actually saying is that the interest rate quoted as being charged on the deferred amount is roughly half of the true rate, so you need to double it to get the right answer.
No, it is very close to the TRUE rate. It is twice the flat rate.

sidicks said:
I.e there is a significant difference between the calculation that us being done and what is actually happening from an economic perspective!
You seem to be trying to introduce a new concept of a calculation being different in economic terms to justify your argument. This isn't open to interpretation from different viewpoints, it's a mathematical calculation that is all. You'll be trying to argue it from a sociopolitical standpoint next. You'll still be wrong, but don't let me stop you from trying to wriggle out of this. Perhaps you could consider and abstract cubism explanation, or maybe argue that if you close one eye and squint a bit the numbers look altogether different.
Manks

sidicks

5,539 posts

106 months

[news] 
Sunday 7th March 2010 quote quote all
Manks said:
What do you mean in economic terms? PCP does charge interest twice on the bubble - go and read the OFT site again.
In the calculation from the OFT website, premiums are calculated based on charging twice the flat rate on the deferred payment.

That is not the same as saying that 'interest' is charged twice on the 'bubble'. The true interest i.e. the effective interest rate is the IRR (i.e. unrounded APR) and that is only charged once on the bubble (and once on the other part of the loan)

manks said:
No, it is very close to the TRUE rate. It is twice the flat rate.
The IRR, which is the unrounded APR, is typically twice the flat rate but only for loans which are repaid evenly over the period.

What about my loan question - when are you going to respond to that?
smile
Sidicks

Manks

Original Poster:

7,546 posts

107 months

[news] 
Sunday 7th March 2010 quote quote all
sidicks said:
Manks said:
What do you mean in economic terms? PCP does charge interest twice on the bubble - go and read the OFT site again.
In the calculation from the OFT website, premiums are calculated based on charging twice the flat rate on the deferred payment.
Yes

sidicks said:
That is not the same as saying that 'interest' is charged twice on the 'bubble'.
I think it is. The flat rate is an interest rate and it is being applied twice to the deferred sum, which in common parlance is known as a "bubble".

sidicks said:
The true interest i.e. the effective interest rate is the IRR (i.e. unrounded APR) and that is only charged once on the bubble (and once on the other part of the loan)
Well I am not going to staate categorically that you are wrong. But if you are right the OFT is wrong. How confident are you that they are wrong?

sidicks said:
What about my loan question - when are you going to respond to that?
When it becomes relvant to the discussion.


Manks

sidicks

5,539 posts

106 months

[news] 
Sunday 7th March 2010 quote quote all
Manks said:
Well I am not going to staate categorically that you are wrong. But if you are right the OFT is wrong. How confident are you that they are wrong?
Why can't we both be right, as we are taking about different things:

The OFT is using a simple rate of interest purely used to calculate premiums which takes no account of the timing of payments.

However, because the rate is a simple rate and does not take into account the timing of cashflows and the impact of compounding it does not represent the true cost of the finance. That is why I am saying that in reality you are not actually being charged twice on the bubble, because the true rate, the IRR is only applied once.

Manks said:
When it becomes relvant to the discussion.Manks
It is relevant as it demonstrates the usefulness of APR and the huge limitations of flat rate, and why the APR is the objective, meaningful measure.
smile
Sidicks

Manks

Original Poster:

7,546 posts

107 months

[news] 
Sunday 7th March 2010 quote quote all
sidicks said:
Manks said:
Well I am not going to staate categorically that you are wrong. But if you are right the OFT is wrong. How confident are you that they are wrong?
Why can't we both be right, as we are taking about different things:

The OFT is using a simple rate of interest purely used to calculate premiums which takes no account of the timing of payments.

However, because the rate is a simple rate and does not take into account the timing of cashflows and the impact of compounding it does not represent the true cost of the finance. That is why I am saying that in reality you are not actually being charged twice on the bubble, because the true rate, the IRR is only applied once.

Manks said:
When it becomes relvant to the discussion.Manks
It is relevant as it demonstrates the usefulness of APR and the huge limitations of flat rate, and why the APR is the objective, meaningful measure.
smile
Sidicks
Sidicks

I am going to draw a line under this now.

My question was how to correctly calculate PCP finance. The answer is provided by the OFT website and using their method gives an answer that tallies with a broker's PCP quote generator.

So I am satisfied that I now have the correct answer.

Thanks for your input.

Manks

johnfm

10,832 posts

135 months

[news] 
Sunday 7th March 2010 quote quote all
I think you're all a bit confused by IRR, APR adn flat rate of interest TBH.

The flat rate of interest allows you to calculate what monthly payment must be made at that rate.

The cashflows that this suggest should then be assessed to derive IRR on that cashflow.

That IRR is then used to calculate the APR.

My calcs are those which Fortis use for their funding models- so I assume it is correct. wink

sidicks

5,539 posts

106 months

[news] 
Sunday 7th March 2010 quote quote all
johnfm said:
I think you're all a bit confused by IRR, APR adn flat rate of interest TBH.

The flat rate of interest allows you to calculate what monthly payment must be made at that rate.

The cashflows that this suggest should then be assessed to derive IRR on that cashflow.

That IRR is then used to calculate the APR.

My calcs are those which Fortis use for their funding models- so I assume it is correct. wink
I think that you and I know what we are talking about! It's just a misunderstanding from Manks about how PCP premiums are calculated on some finance model packages ('flat rate fudge approach') versus how interest rates works in practice ('internal rate of return / effective rate of return').

I was being lazy previously using APR when I meant IRR, as the difference is just rounding.

Thanks for your helpful comments!
smile
Sidicks

Edited by sidicks on Sunday 7th March 14:53

johnfm

10,832 posts

135 months

[news] 
Monday 8th March 2010 quote quote all
If I could upload the excel spreadsheet, the issue woul dbe resolved once and for all.

But I don't have anywhere to host it.

Manks

Original Poster:

7,546 posts

107 months

[news] 
Monday 8th March 2010 quote quote all
johnfm said:
If I could upload the excel spreadsheet, the issue woul dbe resolved once and for all.

But I don't have anywhere to host it.
If you are 100% sure it is correct (and I am sure it is) perhaps you could report your own post and ask the moderators to host it on a sticky?

Manks

sidicks

5,539 posts

106 months

[news] 
Monday 8th March 2010 quote quote all
Manks said:
johnfm said:
If I could upload the excel spreadsheet, the issue woul dbe resolved once and for all.

But I don't have anywhere to host it.
If you are 100% sure it is correct (and I am sure it is) perhaps you could report your own post and ask the moderators to host it on a sticky?

Manks
I do love a happy ending!

Sidicks
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