How is interest calculated on PCP agreements?

[taybagger]

Hi guys, long term lurker here but registered as I'm after some guidance. If anyone can help, it would be greatly appreciated.

In December 2018, I'll be at the end of my PCP agreement for my current car and I'm weighing up my options. I've never really paid attention to the details about my previous finance agreements - I just knew I needed a car that wouldn't break down and signed the dotted line.

I was wondering, if, given the information I know about my current agreement, if it's possible to calculate the interest I'm due over the duration of my PCP deal?

I've been trying to get do it on Google Sheets for a few days and although I get close, I can't quite match the figure I was given by the finance company. Even when I phoned the finance company for a breakdown, they told me I shout get a financial advisor.

If I use my real life figures as an example, I feel as if I should be able to calculate amount of interest I've been quoted to pay back but I can't - surely it's a science and they don't just pluck numbers out the air?

Car Price: £14,299
Deposit: £700
Credit Required: £13,599
Interest Rate: 3.5%
APR: 7.8%
Total Interest: £2,579.44

Repayment:

First Payment: £276.53 (includes £40 "Credit Facility Fee")
47 payments of: £236.53
Final Payment (GFMV): £4,825
Completion Fee: £299

I just can't figure out how, given the information above, the total interest is £2,579.44 and I'm worried it's been miscalculated?

Absolutely any information would be much appreciated, my finance company have been useless and I'm struggling to wrap my head around this.

[sidicks]

taybagger said:

Hi guys, long term lurker here but registered as I'm after some guidance. If anyone can help, it would be greatly appreciated.

In December 2018, I'll be at the end of my PCP agreement for my current car and I'm weighing up my options. I've never really paid attention to the details about my previous finance agreements - I just knew I needed a car that wouldn't break down and signed the dotted line.

I was wondering, if, given the information I know about my current agreement, if it's possible to calculate the interest I'm due over the duration of my PCP deal?

I've been trying to get do it on Google Sheets for a few days and although I get close, I can't quite match the figure I was given by the finance company. Even when I phoned the finance company for a breakdown, they told me I shout get a financial advisor.

If I use my real life figures as an example, I feel as if I should be able to calculate amount of interest I've been quoted to pay back but I can't - surely it's a science and they don't just pluck numbers out the air?

Car Price: £14,299
Deposit: £700
Credit Required: £13,599
Interest Rate: 3.5%
APR: 7.8%
Total Interest: £2,579.44

Repayment:

First Payment: £276.53 (includes £40 "Credit Facility Fee")
47 payments of: £236.53
Final Payment (GFMV): £4,825
Completion Fee: £299

I just can't figure out how, given the information above, the total interest is £2,579.44 and I'm worried it's been miscalculated?

Absolutely any information would be much appreciated, my finance company have been useless and I'm struggling to wrap my head around this.

The best way of thinking about this is to split the PCP into two components:

1) the GFMV plus completion fee on which you just pay interest
2) the car price (and any additional upfront charges) less the deposit paid less the GFMV, which you can treat as an ordinary loan, where interest is paid and where the balance declines to zero over the period.

[CaptainSlow]

You need to work out the average capital employed and then realise that the interest rate quote is likely to be the flat rate...so double it.

ACE is (funded amount - gfv)/2 + GFV

Total interest is I. Rate (Flat * 2) * ACE * Term (yrs)

[sidicks]

CaptainSlow said:

You need to work out the average capital employed and then realise that the interest rate quote is likely to be the flat rate...so double it.

ACE is (funded amount - gfv)/2 + GFV

Total interest is I. Rate (Flat * 2) * ACE * Term (yrs)

APR = flat rate * 2 (approximately) doesn’t work for PCP deals, only for standard repay,ent loans.
Regardless, the OP has both the flat rate and APR figures already.

[Butter Face]

taybagger said:

Hi guys, long term lurker here but registered as I'm after some guidance. If anyone can help, it would be greatly appreciated.

In December 2018, I'll be at the end of my PCP agreement for my current car and I'm weighing up my options. I've never really paid attention to the details about my previous finance agreements - I just knew I needed a car that wouldn't break down and signed the dotted line.

I was wondering, if, given the information I know about my current agreement, if it's possible to calculate the interest I'm due over the duration of my PCP deal?

I've been trying to get do it on Google Sheets for a few days and although I get close, I can't quite match the figure I was given by the finance company. Even when I phoned the finance company for a breakdown, they told me I shout get a financial advisor.

If I use my real life figures as an example, I feel as if I should be able to calculate amount of interest I've been quoted to pay back but I can't - surely it's a science and they don't just pluck numbers out the air?

Car Price: £14,299
Deposit: £700
Credit Required: £13,599
Interest Rate: 3.5%
APR: 7.8%
Total Interest: £2,579.44

Repayment:

First Payment: £276.53 (includes £40 "Credit Facility Fee")
47 payments of: £236.53
Final Payment (GFMV): £4,825
Completion Fee: £299

I just can't figure out how, given the information above, the total interest is £2,579.44 and I'm worried it's been miscalculated?

Absolutely any information would be much appreciated, my finance company have been useless and I'm struggling to wrap my head around this.

Total of payments (excluding fees) + GMFV iS your total payable (excluding fees)

Remove the original amount borrowed leaves you with the total interest payable over the term which in your case is bang on £2579.44 so no miscalculation.

[CaptainSlow]

sidicks said:

CaptainSlow said:

You need to work out the average capital employed and then realise that the interest rate quote is likely to be the flat rate...so double it.

ACE is (funded amount - gfv)/2 + GFV

Total interest is I. Rate (Flat * 2) * ACE * Term (yrs)

APR = flat rate * 2 (approximately) doesn’t work for PCP deals, only for standard repay,ent loans.
Regardless, the OP has both the flat rate and APR figures already.

I'm saying it approximates the real interest rate..not the APR...use the formula and it comes out within a couple of pence.

[taybagger]

Thank you for all your help & advice.

I've got a calculation which has me 8p out which I think is good enough for me. Being a programmer, it does upset me I can't get it to match up exactly but hey ho, will have to do!

Thanks again everyone!

[CaptainSlow]

taybagger said:

Thank you for all your help & advice.

I've got a calculation which has me 8p out which I think is good enough for me. Being a programmer, it does upset me I can't get it to match up exactly but hey ho, will have to do!

Thanks again everyone!

Yeah mine is 8p out too. Will be due to roundings in the monthlies.

[sidicks]

CaptainSlow said:

I'm saying it approximates the real interest rate..not the APR...use the formula and it comes out within a couple of pence.

[Butter Face]

CaptainSlow said:

taybagger said:

Thank you for all your help & advice.

I've got a calculation which has me 8p out which I think is good enough for me. Being a programmer, it does upset me I can't get it to match up exactly but hey ho, will have to do!

Thanks again everyone!

Yeah mine is 8p out too. Will be due to roundings in the monthlies.

How can you be 8p out?

48x £236.53 = £11,353.44

£11,353.44 + £4825 (GMFV) = £16,178.44 (total payable excluding the fees)

£16,178.44 - £13799 = £2,579.44

The figures are bang on.

[taybagger]

Butter Face said:

How can you be 8p out?

48x £236.53 = £11,353.44

£11,353.44 + £4825 (GMFV) = £16,178.44 (total payable excluding the fees)

£16,178.44 - £13799 = £2,579.44

The figures are bang on.

Cheers Butter Face, but I'm trying to work it out from the perspective of the finance company.

I've told them I want to borrow £13,599, they'll lend me the money at an interest rate of 3.5% and an APR at 7.8%, how much interest does that incur? The monthly payments you are using in your calculation are derived after interest has been added. I want to know how they came up with the interest figure initially.

This is an excerpt from the documentation I dug out, which, when using this calculation, gets me 8p out;

'Interest' explained

Interest is a percentage of your credit amount, which is our charge for
lending you money.

To calculate the amount of interest you will pay, we multiply the total of
the credit amount plus the final repayment by the interest rate and then
by the number of years you have to repay the credit.

Your repayments would be the credit amount and interest added
together, and divided by the number of months the credit is spread
across.

[sidicks]

taybagger said:

Cheers Butter Face, but I'm trying to work it out from the perspective of the finance company.

I've told them I want to borrow £13,599, they'll lend me the money at an interest rate of 3.5% and an APR at 7.8%, how much interest does that incur? The monthly payments you are using in your calculation are derived after interest has been added. I want to know how they came up with the interest figure initially.

This is an excerpt from the documentation I dug out, which, when using this calculation, gets me 8p out;

'Interest' explained

Interest is a percentage of your credit amount, which is our charge for
lending you money.

To calculate the amount of interest you will pay, we multiply the total of
the credit amount plus the final repayment by the interest rate and then
by the number of years you have to repay the credit.

Your repayments would be the credit amount and interest added
together, and divided by the number of months the credit is spread
across.

APR is rounded down to the nearest 0.1% (I think), so the actual effective rate could be slightly higher, which could explain the discrepancy that you are seeing.

[taybagger]

sidicks said:

APR is rounded down to the nearest 0.1% (I think), so the actual effective rate could be slightly higher, which could explain the discrepancy that you are seeing.

Ah ok, thanks for the info sidicks.

Again, appreciate all the input guys, thank you

[Super Slo Mo]

Butter Face said:

How can you be 8p out?

48x £236.53 = £11,353.44

£11,353.44 + £4825 (GMFV) = £16,178.44 (total payable excluding the fees)

£16,178.44 - £13799 = £2,579.44

The figures are bang on.

Either you or I have missed the point of the original question.
I think the OP is asking how the interest amount is calculated from the original sums quoted, ie purchase price of the car times the interest rate times the term.
Obviously that isn’t the calculation, I’m paraphrasing, but the OP already has the interest figure as calculated by the car dealer, he just wants to cross reference it by calculating it himself.

At least, that’s how I read it.

[taybagger]

Super Slo Mo said:

Either you or I have missed the point of the original question.
I think the OP is asking how the interest amount is calculated from the original sums quoted, ie purchase price of the car times the interest rate times the term.
Obviously that isn’t the calculation, I’m paraphrasing, but the OP already has the interest figure as calculated by the car dealer, he just wants to cross reference it by calculating it himself.

At least, that’s how I read it.

Yeh that's bang on mat.

I can live with it now, 8p out is much closer than I was before haha.