Watching BBC2's Wrong Car, Right Car Dominic is often seen hammering his calculator in order to calculate the amount in monthly repayments the punter will have to pay based on the dealer's quoted interest rate. Plus they always talk about the 'flat rate' of interest.
Can someone explain to me what exactly is flat rate interest and how do you work it back to get your monthly repayment amount?
About to do some serious negotiation on a car and would like to go in with a way of comparing the dealer's finance package to some of the other loan providers I have been looking at.
Any help would be much appreciated.
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APR is the only number that matters, at least once you've chosen what kind of finance package (PCP, balloon, standard repayment). Flat rate is a simple way of calculating the interest based on the three years, but APR is the one to go for as that is what is *always* quoted and lets you compare like for like.
uk.biz.yahoo.com/loan/ gives a very good overview of the finance market.
If you want to do a balloon payment (e.g., you borrow the money now and still owe 40% in 3 years' time when the loan is scheduled to end) then have a look at www.smartermotoring.com
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If flat rate = i% and loan is £y for x years then the monthly payment is simply:
(y + y*x*i/100) / (12*x)
ie (Loan plus total interest payable) divided by number of payments!
eg, £10,000 loan at 10% flat interest over 5 years, monthly payment is:
( 10000 + 10000 * 5 * 10/100 ) / (12*5) = £250 per month
The APR is roughly twice the flat rate (as on average half the loan is outstanding - 100% at start, 0% at finish)
clariman
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Flat rate calculations are dead easy - for reasons that aren't dead easy, the flat rate seems to be almost exactly half the APR - so a quoted flat rate of 5% is approx 9.8 APR.
Working on the flat rate is much simpler - say you are borrowing £10k at 5% flat over 3 years - you multiply the RATE by the number of YEARS - in this case 5x3 =15 - and that is the amount of interest you'll pay - ie 15% of 10k - £1500. So - that's the first bit. You can use that to compare very directly with what the bank or whoever would be charging you. The clever bit is when you then add the £1500 (or whatever figure in your own case) to the amount borrowed - in this case that gets £11500. Over three years, thats divided by 36 (months!) to get a repayment of ... whatever £11500 divided by 36 is! (too late at night and no calculator handy!)
Same applies if - eg - borrowing at 7% flat over 4 years - add 28% to amount borrowed, divide by 48 - and so on.
A useful crosscheck just to make sure you've got the noughts in the right place is that a grand borrowed over 3 years will cost you about £32/£33 a month - over 4 years, just over £25, over 5 years just over £20, and over 2 years about £50.
Remember the finance rate is as negotiable as anything else - the garage gets a comission on the finance depending on what rate they sign you up at - they wil have a minumum rate for different ages of car - say 0-1, 1-3, 3-5. over 5 - older cars are dearer to buy. (greater perceived risk of default?) If they sign you up at that rate, they just get a documentation fee - if they sign you at a higher rate, they get a percentage of the extra interest you'll pay... so worth stating that you're very rate-conscious and asking what their best rate is... or you'll go to the bank. Then do the sums above to see whether they're lying. And they may well be!
Good hunting!
Neil
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With unsecured loans available from 6.8% (APR) if you look around, I'm astonished that so many people stick to the high street banks or used dealer finance unless it's a subsidised deal.
Mind you, when I worked for a Rover dealership it was my job to maximise finance profit and I was frankly horrified with how ill-prepared and under-researched many customers appeared to be with regard to finance rates. There were countless opportunities to apply truly hideous rates (which I refused to do), which probably explains why I had a little falling out with the Dealer Principle and resigned.
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PhilC:
"flat rate" is calculated assuming that the amount of interest you would pay if the capital borrowed was all paid off in one lump sum at the end of the period.
e.g. £100 borrowed at 10% flat rate for 2 years; interest due would be (£10 x 2 years) = £20. Your deal would be to pay back (£100 + £20)= £120 over 24 months, i.e. £5 x 24 monthly instalments
The "flat rate" appears to be very low compared to a true rate because in reality you will be paying off your loan monthly (comprising elements of capital and interest) and so your debt is reducing all the time. In other words, in the above example, you have not borrowed £100 for 2 years; but £100 for 1 month and reducing thereafter by the capital element of your intalment.
I believe it is illegal to advertise loans using a "flat rate" and the consumer credit laws require a true APR to be quoted, and in writing if you request it.
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To find the official government version of how to calculate the real APR, look at
"APPENDIX 1
EXAMPLES OF THE CALCULATION OF THE ANNUAL PERCENTAGE RATE OF CHARGE"
found at
www.consumer.gov.uk/cacp/ca/consultation/tapatc.htm
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If you're able to REALLY control your finances, why not buy the car with NO interest charges?
Just sign up for one of the 0% credit cards & buy it on that? When you get near the end of the discounted period, transfer balance to another 0% deal.
You can carry on like this forever, judging by the number of card issuers around!
VB
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I considered doing this Vansboy, but Someone who should Know warned me that ultimately it adversely affects your credit rating, which could make life difficult in future...
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Moving money between new credit cards to maintain an effectively free loan works rather nicely if you can be bothered. I've been doing it for a few years now and always have about £5,000 on an interest free card at any one time. Sadly, you're unlikely to get a credit limit high enough to buy a new car!
I used to work at a credit rating agency, and yes it can affect your credit rating, but not by much. I take it in turns with SWMBO to be the main cardholder with the other as an additional card holder, hence each of us will only get a new card (and hence a match on same address, same surname, same initial on our credit rating) about once a year. I'll start to worry about my credit rating if I get refused the next card.
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Swapping lenders as no real impact on your credit rating long term, for the vast majority of lenders. I've been doing it for years and I still keep getting new offers.
Missing one or two monthly payments has a dramatic effect.
As regards APR's also always ask for details of the total amount repayable. This can show up how horrendously expensive some balloon payment finance deals actually are.
Reminds me of when I bought my last car. Dealer says I can guarantee that we can beat any flat rate finance deal you've been offered by at least 1%. So I say that's great I can get the money at 6%, so he does the calculations and makes a phone call says no problem sir we'll it to you at 5% flat, to which I reply no 6% APR that's 3% flat. Poor bloke turned a very funny colour! Sadly I couldn't prove what he had said.
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Also, don't forget the £100 or so, 'Document Fee' the finance co. charge on the first payment.THEN, a final figure to own the car, £50 ish sometimes.
You would avoid these costs, sorting your own loan.
Other than the secondary protection, should you have a major problem with the car, or wish to hand it back half way through the deal, it usually makes sense to choose your own finace provider.
VB
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