PCP Calculation

[Manks]

Hi All

I have been discussing buying a new car because my local dealer is offering high guaranteed future values. However I am unable to get my calculations to coincide with theirs.

To my mind a PCP deal is just a finance deal with a deferred final payment, the magnitude of which is fixed. So an example deal would work like this:

Car price £10000

Deposit £1000

Balloon £5000

Term 3 years

Rate 5% flat.

So, interest is payable on £9000 at 5% per annum for 36 payments. = £37.50

Capital to be repaid is £4000, so 4000 divided by 36 payments = £111.11

So total monthly payment is £148.61

However their figures are working out about 25% higher and they cannot explain why. Their printed quote just says "additional charges" for the interest figure.

Can anyone point out whether I am missing something please?

Manks

[daemon]

Manks said:

Hi All

I have been discussing buying a new car because my local dealer is offering high guaranteed future values. However I am unable to get my calculations to coincide with theirs.

To my mind a PCP deal is just a finance deal with a deferred final payment, the magnitude of which is fixed. So an example deal would work like this:

Car price £10000

Deposit £1000

Balloon £5000

Term 3 years

Rate 5% flat.

So, interest is payable on £9000 at 5% per annum for 36 payments. = £37.50

Capital to be repaid is £4000, so 4000 divided by 36 payments = £111.11

So total monthly payment is £148.61

However their figures are working out about 25% higher and they cannot explain why. Their printed quote just says "additional charges" for the interest figure.

Can anyone point out whether I am missing something please?

Manks

Amount of finance = £9000

3 years @ 5% flat = £1350 of interest.

Total amount repaid = £10350. Minus balloon payment = £5350.

Divide that by 36 = £148 p/m

so, yes, your figures appear to be correct.

Edited by daemon on Friday 5th March 13:17

[RS6 see you]

PCP agreements work off a yield not a flat rate although it is the flat rate which calculates the yield, that is why your unable to work it out.

on the figures quoted
9000 borrowed
5000 gfv
payments on a pcp would be 170.70 per month over 36 months

[Manks]

RS6 see you said:

PCP agreements work off a yield not a flat rate although it is the flat rate which calculates the yield, that is why your unable to work it out.

on the figures quoted
9000 borrowed
5000 gfv
payments on a pcp would be 170.70 per month over 36 months

Can you explain that a little more fully please?

What do you mean it works off a yield and how is the flat rate used to calculate it?

[audi321]

How many times on this forum do we have to say FORGET THE FLAT RATE AND FIND OUT THE APR!

[Manks]

audi321 said:

How many times on this forum do we have to say FORGET THE FLAT RATE AND FIND OUT THE APR!

I don't know, but you can say it a lot if you like.

What would be more helpful if if you'd answer the bloody question. Assuming that you know the answer of course, which I suspect you don't.

The APR of the deal in question is about 8.8%, but that is a completely useless piece of information.

APR is just something introduced so that your average numpty buying on tick can work out whether he is being shafted more by one lender than another. It doesn't help you calculate exact loan repayment costs.

Manks

Edited by Manks on Friday 5th March 16:10

[audi321]

Manks said:

audi321 said:

How many times on this forum do we have to say FORGET THE FLAT RATE AND FIND OUT THE APR!

I don't know, but you can say it a lot if you like.

What would be more helpful if if you'd answer the bloody question. Assuming that you know the answer of course, which I suspect you don't.

The APR of the deal in question is about 8.8%, but that is a completely useless piece of information.

APR is just something introduced so that your average numpty buying on tick can work out whether he is being shafted more by one lender than another. It doesn't help you calculate exact loan repayment costs.

Manks

Edited by Manks on Friday 5th March 16:10

LOL. The APR takes into account the charges, and rather than try to belittle me, I was actually trying to point out that this is probably where you are going wrong (i.e. hidden charges!). I won't bother trying to help in future you ignoramus

[Manks]

audi321 said:

Manks said:

audi321 said:

How many times on this forum do we have to say FORGET THE FLAT RATE AND FIND OUT THE APR!

I don't know, but you can say it a lot if you like.

What would be more helpful if if you'd answer the bloody question. Assuming that you know the answer of course, which I suspect you don't.

The APR of the deal in question is about 8.8%, but that is a completely useless piece of information.

APR is just something introduced so that your average numpty buying on tick can work out whether he is being shafted more by one lender than another. It doesn't help you calculate exact loan repayment costs.

Manks

Edited by Manks on Friday 5th March 16:10

LOL. The APR takes into account the charges, and rather than try to belittle me, I was actually trying to point out that this is probably where you are going wrong (i.e. hidden charges!). I won't bother trying to help in future you ignoramus

It's not the charges, which are just a few pounds and itemised separately. Or at least it isn't what one would normally refer to as charges.

Who are you calling an ignoramus when you're the one that thinks APR is all you need to know about finance.

Now collect up your toys and behave ;-)

Manks

[CaptainSlow]

Manks said:

So, interest is payable on £9000 at 5% per annum for 36 payments. = £37.50

OK this is where you are going wrong. Remember when you are paying your monthly installment you are paying off an element of the capital balance of the vehicle, this reduces the balance interest is charged on. With this in mind and using the APR of 8.8% to take into account charges and then adding VAT on this (but not the £4,000 depreciation) I get to a monthly amount of circa £171.

Anymore clues and I'll start charging my consultancy fees

[Manks]

CaptainSlow said:

Manks said:

So, interest is payable on £9000 at 5% per annum for 36 payments. = £37.50

OK this is where you are going wrong. Remember when you are paying your monthly installment you are paying off an element of the capital balance of the vehicle, this reduces the balance interest is charged on. With this in mind and using the APR of 8.8% to take into account charges and then adding VAT on this (but not the £4,000 depreciation) I get to a monthly amount of circa £171.

Anymore clues and I'll start charging my consultancy fees

The car price already includes VAT

Furthermore my example assumes that the capital does not reduce, so the cost should be more, and yet their figures are still higher.

Don't get the invoice book out just yet ;-)

[CaptainSlow]

in that case there are other charges somewhere, happy to look at it if you want to pm me

[daemon]

CaptainSlow said:

Manks said:

So, interest is payable on £9000 at 5% per annum for 36 payments. = £37.50

OK this is where you are going wrong. Remember when you are paying your monthly installment you are paying off an element of the capital balance of the vehicle, this reduces the balance interest is charged on. With this in mind and using the APR of 8.8% to take into account charges and then adding VAT on this (but not the £4,000 depreciation) I get to a monthly amount of circa £171.

Anymore clues and I'll start charging my consultancy fees

I cant see you making much on consultancy if you think VAT is added to a PCP finance deal.

[daemon]

audi321 said:

Manks said:

audi321 said:

How many times on this forum do we have to say FORGET THE FLAT RATE AND FIND OUT THE APR!

I don't know, but you can say it a lot if you like.

What would be more helpful if if you'd answer the bloody question. Assuming that you know the answer of course, which I suspect you don't.

The APR of the deal in question is about 8.8%, but that is a completely useless piece of information.

APR is just something introduced so that your average numpty buying on tick can work out whether he is being shafted more by one lender than another. It doesn't help you calculate exact loan repayment costs.

Manks

Edited by Manks on Friday 5th March 16:10

LOL. The APR takes into account the charges, and rather than try to belittle me, I was actually trying to point out that this is probably where you are going wrong (i.e. hidden charges!). I won't bother trying to help in future you ignoramus

The difference between what i and the O/P calculated compared to what your 'hidden charges' inclusive price comes to around £700. I'd like to see how the finance company can justify that charge.

[sidicks]

Ok, as has already been posted previously (hundreds of times), flat rate is meaningless, you need to use the APR to calculate the monthly payments, as this takes into account all fees etc.

With a £10k car and £1k deposit, there is £9k to finance. Effectively there are 2 parts to this agreement:
- A £5000 loan (residual) on which interest is paid but no capital
- A £4000 loan which is re-payable over 3 years

Using an APR of 8.8% (equivalent to a monthly rate of 0.71%):
The interest on the £5k loan is £35.27 per month
The interest and capital repayment on the £4k loan is £126.20

This leads to a total premium of £161.47

Easy!

Sidicks

[sidicks]

daemon said:

Amount of finance = £9000

3 years @ 5% flat = £1350 of interest.

Total amount repaid = £10350. Minus balloon payment = £5350.

Divide that by 36 = £148 p/m

so, yes, your figures appear to be correct.

Incorrect!!

I suggest if you don't understand finance you don't try and 'help' the OP, as you are just adding to the confusion!!!!!

Sidicks

[sidicks]

Manks said:

The APR of the deal in question is about 8.8%, but that is a completely useless piece of information.

APR is just something introduced so that your average numpty buying on tick can work out whether he is being shafted more by one lender than another. It doesn't help you calculate exact loan repayment costs.

I'm afraid there is only one numpty here and it isn't audi321.......

Sidicks

Edited by sidicks on Saturday 6th March 09:04

[daemon]

sidicks said:

daemon said:

Amount of finance = £9000

3 years @ 5% flat = £1350 of interest.

Total amount repaid = £10350. Minus balloon payment = £5350.

Divide that by 36 = £148 p/m

so, yes, your figures appear to be correct.

Incorrect!!

I suggest if you don't understand finance you don't try and 'help' the OP, as you are just adding to the confusion!!!!!

Sidicks

And i suggest you try to not come across as an obnoxious tt.

Thats why i put 'appear' to be correct.

Edited by daemon on Saturday 6th March 10:04

[Manks]

sidicks said:

Ok, as has already been posted previously (hundreds of times), flat rate is meaningless, you need to use the APR to calculate the monthly payments, as this takes into account all fees etc.

With a £10k car and £1k deposit, there is £9k to finance. Effectively there are 2 parts to this agreement:
- A £5000 loan (residual) on which interest is paid but no capital
- A £4000 loan which is re-payable over 3 years

Using an APR of 8.8% (equivalent to a monthly rate of 0.71%):
The interest on the £5k loan is £35.27 per month
The interest and capital repayment on the £4k loan is £126.20

This leads to a total premium of £161.47

Easy!

Sidicks

Nope, that's not the explanation. What you have done there is exactly the same as I did in the OP but used the APR instead of the flat rate, which is why your calculation is wrong.

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.

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.

And that is partly why APR is useless. It doesn't explain any of that, all it does is provide a comparative measure to compare loans. APR is also useless, however, because it is allowed to be rounded down and also because different elements of the loan have a different bearing on how the APR rate appears.

So, this is far more complex a question than it appears. "Look at the foookin APR mate" is not the answer and what happens when you create a simple comparative measure that everyone understands - they think it's the answer to everything. To a man with a hammer, every problem looks like a nail.

ItaI'm afraid there is only one numpty here and it isn't audi321.......

Wrong again Sidicks, you've obviously used APR in your calculations. There are in fact two of you.;)

Manks

Edited by Manks on Saturday 6th March 11:09

[sidicks]

Manks said:

Nope, that's not the explanation. What you have done there is exactly the same as I did in the OP but used the APR instead of the flat rate, which is why your calculation is wrong.

Given the cashflows you have described, my calculation is 100% correct. That's what the APR is - it is the effective interest rate that is used to equate the cashflows back to the initial loan amount.

Manks said:

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.

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

Manks said:

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.

Wrong!

Manks said:

And that is partly why APR is useless. It doesn't explain any of that, all it does is provide a comparative measure to compare loans. APR is also useless, however, because it is allowed to be rounded down and also because different elements of the loan have a different bearing on how the APR rate appears.

APR is rounded down to the lower 0.1% (or at least it used to be), for simplicity, but that has little practical difference.

Manks said:

So, this is far more complex a question than it appears. "Look at the foookin APR mate" is not the answer and what happens when you create a simple comparative measure that everyone understands - they think it's the answer to everything. To a man with a hammer, every problem looks like a nail.

The flat rate is a meaningless measure as a comparator as it does not take into account the timing of cashfows. Obviously you can use the flat rate to derive the payments, just as you can with the APR but the APR actually means something!!

Manks said:

Wrong again Sidicks, you've obviously used APR in your calculations. There are in fact two of you.;)

That's because that is exactly what the APR is designed for!!

You lose....

[Manks]

sidicks said:

Manks said:

Nope, that's not the explanation. What you have done there is exactly the same as I did in the OP but used the APR instead of the flat rate, which is why your calculation is wrong.

Given the cashflows you have described, my calculation is 100% correct. That's what the APR is - it is the effective interest rate that is used to equate the cashflows back to the initial loan amount.

Manks said:

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.

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

Manks said:

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.

Wrong!

Manks said:

And that is partly why APR is useless. It doesn't explain any of that, all it does is provide a comparative measure to compare loans. APR is also useless, however, because it is allowed to be rounded down and also because different elements of the loan have a different bearing on how the APR rate appears.

APR is rounded down to the lower 0.1% (or at least it used to be), for simplicity, but that has little practical difference.

Manks said:

So, this is far more complex a question than it appears. "Look at the foookin APR mate" is not the answer and what happens when you create a simple comparative measure that everyone understands - they think it's the answer to everything. To a man with a hammer, every problem looks like a nail.

The flat rate is a meaningless measure as a comparator as it does not take into account the timing of cashfows. Obviously you can use the flat rate to derive the payments, just as you can with the APR but the APR actually means something!!

Manks said:

Wrong again Sidicks, you've obviously used APR in your calculations. There are in fact two of you.;)

That's because that is exactly what the APR is designed for!!

You lose....

Sidicks

You should probably read this:

http://www.oft.gov.uk/shared_oft/business_leaflets...

You need the section marked "An option hire purchase agreement". That will explain it to you.

On the subject of double interest on the balloon, see this bit:

"An option loan of the type described in this example is a mixture of an
instalment loan (because of the credit repaid by the 36 monthly instalments)
and a single repayment loan (because of the lump sum paid at the end) and
the lender’s return on the part of the credit repaid by the lump sum is about
half that on the rest of the loan. To counteract this, the lender applies the 5%
rate to both the amount originally borrowed and again to the lump sum paid
at the end (in effect, applying the rate twice to the lump sum amount to
obtain the expected level of return)."


Now, would you like to apologise or email the OFT and call them numpties who don't understand what they are talking about?

Manks