PCP Calculation
Discussion
Manks said:
[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
Surely that is just explaining the contortions you have to go through when you use flat rate instead of APR. 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
Suppose you pay £5000 over 12 months, followed by a £5000 balloon, all at 10% APR.
Looking at the instalment loan the APR enthusiast says the average amount outstanding is about £2500 so the interest is about £250. The flat rate fan says that if the interest of a £5000 loan comes to (approx) £250 that must be a 5% rate, he doesn't care when the money is paid.
Looking at the lump sum the APR enthusiast says that £5000 was outstanding over 1 year at 10% a year so that's £500 interest.
The flat rate fan says that £500 for a £5000 loan is 10%, so he regards the lump sum as attracting double the fat rate as the instalments.
Far simpler to use APR.
Dr Jekyll said:
Manks said:
[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
Surely that is just explaining the contortions you have to go through when you use flat rate instead of APR. 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
Suppose you pay £5000 over 12 months, followed by a £5000 balloon, all at 10% APR.
Looking at the instalment loan the APR enthusiast says the average amount outstanding is about £2500 so the interest is about £250. The flat rate fan says that if the interest of a £5000 loan comes to (approx) £250 that must be a 5% rate, he doesn't care when the money is paid.
Looking at the lump sum the APR enthusiast says that £5000 was outstanding over 1 year at 10% a year so that's £500 interest.
The flat rate fan says that £500 for a £5000 loan is 10%, so he regards the lump sum as attracting double the fat rate as the instalments.
Far simpler to use APR.
There's another big problem with APR as a sole measure too. I have on my desk several quotes with similar APRs. One of them though has a big bubble and lower repayments. But it is the worst deal for most people because it has the lowest capital repayment over the term and the borrowed may well be underwater for most of the loan term, and unable to return the car if they needed to.
But the single biggest problem with APR is that too many people have begun to think it's all you need to know. And it isn't. Far from it.
Manks
Manks said:
That isn't correct. I would caution anyone borrowing significant sums (eg car sized sums) not to rely on APR. It is a comparative measure only. You cannot calculate loan payments from it.
You may not be able to calculate loan payments from it, but you give me ANY cashflow profile and any APR rate and I can easily calculate the loan payments from that information. If you know what you are doing, it's not difficult!!Conversely, you can give me any cashflow profile and and flat rate and I can easily calculate the loan payments from that information as well.
The difference is the APR is a meaningful number as it represents the true cost of the loan over the period as it takes into account the amount and timing of payments whereas the flat rate does not.
manks said:
There's another big problem with APR as a sole measure too. I have on my desk several quotes with similar APRs. One of them though has a big bubble and lower repayments. But it is the worst deal for most people because it has the lowest capital repayment over the term and the borrowed may well be underwater for most of the loan term, and unable to return the car if they needed to.
The lower APR is always the better economic deal because it represents the true interest being charged.What you are saying is that the £ amount (i.e. the total cost for credit) might be higher on such a loan, because of the deferred amount. That is not the same thing - put it this way if you borrowed twice the amount, but with the same interest rate, you'd pay back twice the £ amount in 'charges' but this wouldn't be a better or worse deal!!
Whether the car is worth more and less than the deferred amount is irrelevant as to whether the loan represents a good deal or not. Whether a PCP is the best means of financing the car is not under discussion.
Manks said:
But the single biggest problem with APR is that too many people have begun to think it's all you need to know. And it isn't. Far from it.
Manks
It is the most important thing as it takes into account the time value of money, which the flat rate does not. Hence it is a true cost of interest charged.Manks
Sidicks
Edited by sidicks on Saturday 6th March 14:38
Edited by sidicks on Saturday 6th March 14:45
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???
:-)
Sidicks
£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???
:-)
Sidicks
Edited by sidicks on Saturday 6th March 14:34
Edited by sidicks on Saturday 6th March 14:40
daemon said:
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
CaptainSlow said:
daemon said:
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
Besides, i wasnt the one proposing charging consultancy fees.
I wouldnt be giving up my day job if i were you.
Edited by daemon on Saturday 6th March 16:06
Edited by daemon on Saturday 6th March 16:10
sidicks said:
You may not be able to calculate loan payments from it, but you give me ANY cashflow profile and any APR rate and I can easily calculate the loan payments from that information. If you know what you are doing, it's not difficult!!
Sorry, but you cant.APR includes and fees and charges, therefore you cant possibly calculate the monthly payments with just the APR rate, as you wont know what charges have been applied.
Thats why APR is merely a comparative rate.
Edited by daemon on Saturday 6th March 16:11
Edited by daemon on Saturday 6th March 16:13
daemon said:
I just calculated it wrongly - unless of course you're going to tell us that the non-reducing balance is lent interest free?
Nope didn't suggest that at all. The APR needs to be applied to the average amount lent due to the repayment profile. OP has the calculation now which he has shared with me, neither of us have calculated it the same way.sidicks said:
Dr Jekyll said:
Surely that is just explaining the contortions you have to go through when you use flat rate instead of APR.
Exactly!!Sidicks
Incidentally, if you want to know how the original example works out it's like this. Someone (not I) has bothered to get the pocket calculator out:
Assuming that the borrower meets all his obligations under the credit agreement and ultimately purchases the car by making the final lump sum payment.
The amount of credit provided under the agreement is the cash price less the deposit (£10,000 – £1000) = £9000.
The interest charged on this is calculated as (£9000 x 5% x 3yr) + (£5000 x 5% x 3yr) = £2100 and, as there are no other charges, this is the Total Charge for Credit.
The 36 regular instalments repay the interest and the part of the credit which is not repaid in a lump-sum. The instalments are therefore (£2100 + £9000 – £5000) ÷ 36 = £169.44. The Total Amount Payable is (£1000 + 36 x £169.44 + £5000) = £12,099.84.
The APR would be calculated as a loan of £9000 repaid by 36 monthly instalments of £169.44 and a 37th of £5000.
The APR result is 8.8% when rounded down to next decimal place below the true rate - as the regulations permit.
A system generated PCP quote coomes out at £170.70, which is probaably because the true rate is nearer 5.1% and it too has been rounded down to "5%" for the quote.
Joking aside though Sidick, don't get hung up on APR it is only a guide. It doesn't tell you everything and sometimes the things it doesn't tell you are well worth knowing.
Manks
Edited by Manks on Saturday 6th March 18:01
Manks said:
Joking aside though Sidick, don't get hung up on APR it is only a guide. It doesn't tell you everything and sometimes the things it doesn't tell you are well worth knowing.
Manks
He wont let that one go - i had a similar debate with him some months back, and jesus he does go on and on and on. Manks
Manks] said:
Joking aside though Sidick, don't get hung up on APR it is only a guide. It doesn't tell you everything and sometimes the things it doesn't tell you are well worth knowing.
The APR tells me all I need to know, as it includes the impact of all charges!You haven't answered my question - are we going to swap loans on the basis i laid out above? The flat rate is the same and the total charge for credit is the same.........?
Sidicks
daemon said:
He wont let that one go - i had a similar debate with him some months back, and jesus he does go on and on and on.
I think you lost that argument as well. Plenty of people agreed with me, and I produced a simple example (like the one above) that showed my point, and you couldn't come up with any sort of counter argument.That's probably why one of us has 'FIA' after their name, and one doesn't!
Sidicks
daemon said:
sidicks said:
You may not be able to calculate loan payments from it, but you give me ANY cashflow profile and any APR rate and I can easily calculate the loan payments from that information. If you know what you are doing, it's not difficult!!
Sorry, but you cant.APR includes and fees and charges, therefore you cant possibly calculate the monthly payments with just the APR rate, as you wont know what charges have been applied.
Thats why APR is merely a comparative rate.
Sidicks
Manks said:
There's another big problem with APR as a sole measure too. I have on my desk several quotes with similar APRs. One of them though has a big bubble and lower repayments. But it is the worst deal for most people because it has the lowest capital repayment over the term and the borrowed may well be underwater for most of the loan term, and unable to return the car if they needed to.
Manks
That comment shows a huge lack of understanding!Manks
Sidicks
sidicks said:
Manks said:
There's another big problem with APR as a sole measure too. I have on my desk several quotes with similar APRs. One of them though has a big bubble and lower repayments. But it is the worst deal for most people because it has the lowest capital repayment over the term and the borrowed may well be underwater for most of the loan term, and unable to return the car if they needed to.
Manks
That comment shows a huge lack of understanding!Manks
Sidicks
Manks said:
Why is that then?
(copied from above)The lower APR is always the better economic deal because it represents the true interest being charged.
What you are saying is that the £ amount (i.e. the total cost for credit) might be higher on such a loan, because of the deferred amount. That is not the same thing - put it this way if you borrowed twice the amount, but with the same interest rate, you'd pay back twice the £ amount in 'charges' but this wouldn't be a better or worse deal!!
Whether the car is worth more and less than the deferred amount is irrelevant as to whether the loan represents a good deal or not. Whether a PCP is the best means of financing the car is not under discussion.
I refer to my previous post - why won't you respond to my question about the different loan options??
Sidicks
sidicks said:
daemon said:
He wont let that one go - i had a similar debate with him some months back, and jesus he does go on and on and on.
I think you lost that argument as well. Plenty of people agreed with me, and I produced a simple example (like the one above) that showed my point, and you couldn't come up with any sort of counter argument.That's probably why one of us has 'FIA' after their name, and one doesn't!
Sidicks
And, yes, you sound like the sort of guy who makes a point of putting FIA after his name
I'm not getting into this again with you - i'll let you wind someone else up this time.
Edited by daemon on Saturday 6th March 19:09
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: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?
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
Sorry, is it too late to take that comment back?
Sidicks
sidicks said:
Manks said:
Why is that then?
(copied from above)The lower APR is always the better economic deal because it represents the true interest being charged.
What you are saying is that the £ amount (i.e. the total cost for credit) might be higher on such a loan, because of the deferred amount. That is not the same thing - put it this way if you borrowed twice the amount, but with the same interest rate, you'd pay back twice the £ amount in 'charges' but this wouldn't be a better or worse deal!!
Whether the car is worth more and less than the deferred amount is irrelevant as to whether the loan represents a good deal or not. Whether a PCP is the best means of financing the car is not under discussion.
I refer to my previous post - why won't you respond to my question about the different loan options??
Sidicks
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.
And by the way, if you have FIA after your name why is it that you don't understand how PCPs work?
Manks
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