Interest Rates - Indulge My Ignorance!

[SiT]

Ok so having looked at the Ford Options PCP scheme i then built and specced a car which enabled me to see the PCP breakdown.

On it was listed 'fixed rate borrowing - 3%' and then 'APR - 5.8%' what exactly is the difference??

If i go to my bank for a loan calculation they just provide me with an APR (currently 3.2%) so I am trying to work out what the 'fixed rate borrowing' is and if anyone can help I would be most grateful!

Si

[anonymous-user]

the fixed rate is exactly the percentage of the total loan you pay over the whole repayment period. the apr is different because as you pay back capital on a loan you are in effect paying a higher rate of interest on what is left.

Personally I've always preferred fixed rate info as it tells me exactly what it is costing me, but the govt preferd the apr that no one understands without a calculator.

for example if you borrow £100 and have a fixed rate of 10% you'd pay £10 in interest, but spread over 12 months the APR is actually higher - but you don't pay any more money

[SiT]

Thank you for your prompt response, so if I have this right over the 2 year PCP I will pay 3% interest on the chunk I am paying off is that right??

Si

[Nickp82]

3% per annum so over 2 years you'll pay 6% interest total

[SiT]

Lovely thats what I needed to know thank you!!! SO why do they even list the APR?? Proper confusing that is!

Si

[cuprabob]

It's a legal requirement to state the APR to make it easy to compare financial products.

[Ian Geary]

So, do you now need to calculate the fixed rate of interest you would be paying on a bank loan?

Whilst required to give you apr data, as has been pointed out, the bank apr rate will be slightly higher than just taking the total interest you will repay, and dividing it by the amount you borrow.(or. Is it dividing by the total amount repaid? Dunno)

Ian

[Dr Jekyll]

keirik said:

for example if you borrow £100 and have a fixed rate of 10% you'd pay £10 in interest, but spread over 12 months the APR is actually higher - but you don't pay any more money

Not necessarily.

If you pay the entire £100 plus interest back in one go at the end of the period the APR would also be 10%.

If you pay it back in monthly instalments then on average you are owing just over £50 so the £10 interest is an APR of about 20%.

The APR reflects that the second example isn't such a good deal.

[oop north]

SiT said:

Thank you for your prompt response, so if I have this right over the 2 year PCP I will pay 3% interest on the chunk I am paying off is that right??

Si

Bear in mind that you will pay the apr on the full guaranteed value bit for the full period of the agreement

So in rough terms - the guaranteed bit that you don't pay anything off you pay 12% interest on (2 years x full amount x 6% apr) but on the bit you pay off the same apr is applied on what is outstanding so 6% (sum paid off x 50% x 2 years x 6%) the average amount is roughly 50% of the total because you start at 100% owing and end at 0% owing