APR on a PCP deal
Discussion
Deva Link said:
Only if you don't pay the off the principal until the end.
On a normal HP deal with a decreasing balance the interest charge at 5% flat is about half what you said.
No, you are wrong - the truth is the exact opposite of what you claim, which is why flat rate is useless for such comparisons.On a normal HP deal with a decreasing balance the interest charge at 5% flat is about half what you said.
The flat rate does not take into account when you make repayments.
Take the following 3 scenarios for a £10,000 loan over 3 years:
1) Pay back £9,999 on day 1 and £1,501 at the end of 3 years
2) Pay back £11,500 at the end of 3 years
3) Pay back £319.44 per month in arrears for 3 years.
In all cases:
- Total paid is £11,500
- Flat rate charged is 5%
However, the APR which represents the true cost of borrowing is:
Option 1) 248.1% APR
Option 2) 4.77% APR
Option 3) 9.72% APR
Option 2) is the much better deal!!
Sidicks
Edited by sidicks on Thursday 15th November 10:33
sidicks said:
No, you are wrong - the truth is the exact opposite of what you claim, which is why flat rate is useless for such comparisons.
The flat rate does not take into account when you make repayments.
Take the following 3 scenarios for a £10,000 loan over 3 years:
1) Pay back £9,999 on day 1 and £1,501 at the end of 3 years
2) Pay back £11,500 at the end of 3 years
3) Pay back £319.44 per month in arrears for 3 years.
In all cases:
- Total paid is £11,500
- Flat rate charged is 5%
However, the APR which represents the true cost of borrowing is:
Option 1) 248.1% APR
Option 2) 4.77% APR
Option 3) 9.72% APR
Option 2) is the much better deal!!
Sidicks
Deal 2 is better but in reality a lender would not charge you the same flat rate.The flat rate does not take into account when you make repayments.
Take the following 3 scenarios for a £10,000 loan over 3 years:
1) Pay back £9,999 on day 1 and £1,501 at the end of 3 years
2) Pay back £11,500 at the end of 3 years
3) Pay back £319.44 per month in arrears for 3 years.
In all cases:
- Total paid is £11,500
- Flat rate charged is 5%
However, the APR which represents the true cost of borrowing is:
Option 1) 248.1% APR
Option 2) 4.77% APR
Option 3) 9.72% APR
Option 2) is the much better deal!!
Sidicks
Edited by sidicks on Thursday 15th November 10:33
loan
Flat rate is purely allows those that don't understand APR how to calculate a premium!
AtticusFinch said:
Deal 2 is better but in reality a lender would not charge you the same flat rate.
Lenders don't charge a 'flat rate' as it is a meaningless number - The cost of borrowing or lending money is an APR type rate (i.e. compund interest), hence that is why APR is the relevant metric.Flat rate is purely allows those that don't understand APR how to calculate a premium!
Edited by sidicks on Thursday 15th November 12:40
sidicks said:
No, you are wrong - the truth is the exact opposite of what you claim, which is why flat rate is useless for such comparisons.
Sorry - brain fart. I know it says flat rate but I looked it up as if 5% was the APR. In practice any loan operates on that basis anyway, but 5% flat on a normal HP/loan deal would give an APR of roughly double that.sidicks said:
Lenders don't charge a 'flat rate' as it is a meaningless number - The cost of borrowing or lending money is an APR type rate (i.e. compund interest), hence that is why APR is the relevant metric.
Flat rate is purely allows those that don't understand APR how to calculate a premium!
Lenders base all on flat rate (only way to work it) however all must be quoted as an APR due to legislation. Who does understand APR? and how do you calculate it? (formula please)Flat rate is purely allows those that don't understand APR how to calculate a premium!
Edited by sidicks on Thursday 15th November 12:40
Flat rate is easy and simple (nothing wrong with that) 10k 12 months @ 5% =£500 what could be easier
AtticusFinch said:
Lenders base all on flat rate (only way to work it) however all must be quoted as an APR due to legislation. Who does understand APR? and how do you calculate it? (formula please)
The markets work on compund interest, so flat rate is an irrelevance - lenders do not base anything on flat rates - as I explained, flat rates may be used to simplify things for employees or customers.APR is not that difficult to understand and in many respects is common sense - the timing of when I repay the loan is as important as how much I repay!
For a simple repayment loan (monthly)
Repayment = Loan amount * i(12) /(1-(1/(1+i(12))^n))
where n = number of months
i(12)= "MPR" =(1+APR)^(1/12)-1
AtticusFinch said:
Flat rate is easy and simple (nothing wrong with that) 10k 12 months @ 5% =£500 what could be easier
But flate rate does NOT relate to how interest is calculated in the real world - e.g. on bank accounts for example.Because, as my examples show, different cashflows can have the same flat rate and same total cost but have hugely different APRs - APRs represent the true cost of borrowing.
Edited by sidicks on Thursday 15th November 15:20
sidicks said:
Because, as my examples show, different cashflows can have the same flat rate and same total cost but have hugely different APRs - APRs represent the true cost of borrowing.
Of course, everything you say is absolutely true, but I think APRs do confuse people - as your examples show, the same loan and interest rate produces very different APRs. Option 2 is not a better deal if you get to the repayment point and then have to borrow £11,500 to repay the loan!
And we also get those meaningless multiple thousand % APRs from short-term payday loan companies, when all the person borrowing the money wants to know is how much they're going to have to pay back.
Deva Link said:
Of course, everything you say is absolutely true, but I think APRs do confuse people - as your examples show, the same loan and interest rate produces very different APRs.
And they should produce different APR figures as the true cost of the loans are very different!!I'd be quite happy swapping loan A with you for loan B - I'll pay you the cashflows arising under loan B and you pay me the cashflows arising under loan A.
Given that the flat rates are the same and the total costs are the same, surely that's a fair deal.....
sidicks said:
And they should produce different APR figures as the true cost of the loans are very different!!
I'd be quite happy swapping loan A with you for loan B - I'll pay you the cashflows arising under loan B and you pay me the cashflows arising under loan A.
Given that the flat rates are the same and the total costs are the same, surely that's a fair deal.....
I'm sure you are absolutly right. However all that the average Joe Public wants to know is.I'd be quite happy swapping loan A with you for loan B - I'll pay you the cashflows arising under loan B and you pay me the cashflows arising under loan A.
Given that the flat rates are the same and the total costs are the same, surely that's a fair deal.....
1. What the total cost(interest amount) is over the whole loan?
2. What the monthly payments are?
3. Is there a baloon payment at the end?
Apr and flat rates can confuse in equal measure.
In fact in my experience the average Joe, buying a car on finance only wants to know what his monthly payments are going to be.
oldnbold said:
I'm sure you are absolutly right. However all that the average Joe Public wants to know is.
1. What the total cost(interest amount) is over the whole loan?
2. What the monthly payments are?
3. Is there a baloon payment at the end?
Apr and flat rates can confuse in equal measure.
In fact in my experience the average Joe, buying a car on finance only wants to know what his monthly payments are going to be.
Which is what the finance company relies upon - the profitability of the contract to the finance company is linked to the APR NOT the total cost!1. What the total cost(interest amount) is over the whole loan?
2. What the monthly payments are?
3. Is there a baloon payment at the end?
Apr and flat rates can confuse in equal measure.
In fact in my experience the average Joe, buying a car on finance only wants to know what his monthly payments are going to be.
oldnbold said:
In fact in my experience the average Joe, buying a car on finance only wants to know what his monthly payments are going to be.
Just last year I had a VW dealer sales manger say he couldn't tell me the APR on finance offer - which I think is illegal. He expected me to sign up based solely on the monthly payments. He only sheepishly agreed there were start and finsh doc fees when I specifically asked him.Deva Link said:
Just last year I had a VW dealer sales manger say he couldn't tell me the APR on finance offer - which I think is illegal. He expected me to sign up based solely on the monthly payments. He only sheepishly agreed there were start and finsh doc fees when I specifically asked him.
I am sure it is a legal requirement to provide the APR - for good reason!sidicks said:
APR is not that difficult to understand and in many respects is common sense - the timing of when I repay the loan is as important as how much I repay!
For a simple repayment loan (monthly)
Repayment = Loan amount * i(12) /(1-(1/(1+i(12))^n))
where n = number of months
i(12)= "MPR" =(1+APR)^(1/12)-1
Oh thanks, thats nice and clear now For a simple repayment loan (monthly)
Repayment = Loan amount * i(12) /(1-(1/(1+i(12))^n))
where n = number of months
i(12)= "MPR" =(1+APR)^(1/12)-1
Edited by sidicks on Thursday 15th November 15:20
Deva Link said:
Just last year I had a VW dealer sales manger say he couldn't tell me the APR on finance offer - which I think is illegal. He expected me to sign up based solely on the monthly payments. He only sheepishly agreed there were start and finsh doc fees when I specifically asked him.
I'm guessing it was on used car then. The software from some finance houses requires the salesman to input a fair bit of data to produce an exact quote for you, and only accepts the flat rate from the salesman. Once you have put everything in and asked the software to create an example, it will only then give you the APR.If he just did the calculation on his calculator he wouldn't be able to give you the exact APR. But he should have told you about the docs fee's.
oldnbold said:
I'm guessing it was on used car then. The software from some finance houses requires the salesman to input a fair bit of data to produce an exact quote for you, and only accepts the flat rate from the salesman. Once you have put everything in and asked the software to create an example, it will only then give you the APR.
If he just did the calculation on his calculator he wouldn't be able to give you the exact APR. But he should have told you about the docs fee's.
It was new. He said he couldn't do it because the system didn't work at weekends, which I suppose is possible, but seems unlikely. However he still expected me to agree. I did buy the car (cash) but they desperately wanted me to agree to take it on finance. The sales manager stormed off in the end. If he just did the calculation on his calculator he wouldn't be able to give you the exact APR. But he should have told you about the docs fee's.
I understand the incentives and pressures on the dealer to sell finance but he genuinely seemed to think I was some kind of lunatic for paying cash.
Deva Link said:
It was new. He said he couldn't do it because the system didn't work at weekends, which I suppose is possible, but seems unlikely. However he still expected me to agree. I did buy the car (cash) but they desperately wanted me to agree to take it on finance. The sales manager stormed off in the end.
I understand the incentives and pressures on the dealer to sell finance but he genuinely seemed to think I was some kind of lunatic for paying cash.
Well on new he didn't need to get into his system, the APR is laid out by the manafacturer in its quartly marketing campaign. A sales manager would be able to quote you that chapter and verse! I understand the incentives and pressures on the dealer to sell finance but he genuinely seemed to think I was some kind of lunatic for paying cash.
The only situation's I can think of is if you were buying on the last day or so of the quarter and he hadn't been told what the next quarters campaign was and he was hedging his bets, or he was trying to put you into non supported finance.
Both of which would be highly unusual.
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