Hire Purchase - Paying it off early?

foreversummer

Hi

Sorry, I did not wish to hijack someone else's thread, posted by mistake.

I'll start again .....

I am buying a new Toyota car and I planned to pay for it on a personal loan. However, the salesman has offered me £500 off the price if I take Toyota's Hire Purchase agreement at a high APR of 16.5%.

He says that after I have made my first three monthly payments I can simply settle the HP Agreement and finance the car myself with my loan at a much better rate of interest. He said the only penalty will be one month's interest.

I did question the penalty for settling so early in an agreement, but he assures me that I will be £500 better off less one month's interest.

Does this sound right? I'm sure it used to be that if you settled early you could actually end up paying more than you borrowed.

If anyone has done anything similar, or can shed some light, I would appreciate it before I sign on the dotted line.

Many thanks
Foreversummer

Tallymanjohn

I wouldn't personally trust anything a car salesman says, as you suspect, there is almost always a penalty for clearing an HP loan early, but best way is to ask to see the agreement first of all & read through the small print.

Don't know which model you're looking at but a colleague has just bought a new Toyota - he had a small personal loan to make up the 35% deposit & then took advantage of Toyota's offer of 3 years interest free on the balance, but I guess it's not available on all models.

foreversummer

Thanks Tallymanjohn

He told me there is a penalty of one month's interest. I have to keep the Agreement in place for a minimum of three months before they ask for the £500 back. Therefore, based on that, I would obviously gain.

However, I am worried about how the interest is calculated and if the HP agreement might be front-loaded with interest. I was always of the impression that if you settle a loan very early you might end up owing more than you borrowed (?).

Any thoughs?

Tallymanjohn

I don't think there's a definitive answer, it's really a case of reading the small print - there are no hard & fast rules and each contract may differ. If the offer is solely from the dealer, rather than a manufacturer-wide deal, then you must read it closely - sorry...

standupguy

This is an interesting thread!

What is happening here is that the dealer is earning a commission from the Finance company for selling the finance - depending on the balance finance and term and from the apr given, his commission or extra profit, if you like, will probably be well in excess of £1000, and more like £1500?

The terms he will have with the Finance company will have what is called a back-debit commission clause - this means if the agreement runs for more than 3 monthly payments his commission will not be clawed back - hence the encouragement to you to keep the account for 3 months.

So, you save £500 but he comes out at least another £500 to £1000 better off.

The way settlement figures are calculated means that they are not as onerous as they once were and allowing for that and the £500 initital saving you could still be better off overall but nowhere near the £500 saving

If you wanted to play him at his own game, and this is all above board, you could take the Finance and get the £500 extra saving.

Phone the Finance company after a week and ask for a settlement figure - it should not be much more than you borrowed and then settle the HP with your loan.

You will have got your extra £500 saving front end and the dealer will get a shock when he receives his commission statement from the Finance company the following month and sees that the £1500 or so commission he thought he had made has now been debited due to early settlement.

All's fair in love and car buying?

CLAPTON

Get real here, no-one, absolutely no-one believes a car salesman.

Read the T&Cs of the agreement and anything you don't understand come back here and ask.
There should be specific examples of how much you pay to terminate the agreement early... it probably won't be cheap.

standupguy

Settlements are strictly calculated under the CCA using an actuarial method rather than the old rule of 78 where two months interest were added.

Even a percentage of any documentation fees have to be refunded in the settlement quote.

foreversummer

Thanks for that.

I will ask for the terms and conditions. I have not signed the agreement yet, so I will get them first and to through them with a fine tooth comb and look for the examples. Trouble is are they written in plain english or full of jargon.

However, I am beginning to wonder if it is worth the worry and hassle. For £500 it seems that it is, but I would hate to get a shock in three months time. He is saying that I have to keep the agreement for a minimum of three months otherwise the finance company will want the £500 back from me. Also he wants his commission of course!

Foreversummer

foreversummer

Meant to say the finance is being arranged with Toyota Financial Services, and this is a main dealership.

Foreversummer

standupguy

foreversummer wrote: »

Thanks for that.

I will ask for the terms and conditions. I have not signed the agreement yet, so I will get them first and to through them with a fine tooth comb and look for the examples. Trouble is are they written in plain english or full of jargon.

However, I am beginning to wonder if it is worth the worry and hassle. For £500 it seems that it is, but I would hate to get a shock in three months time. He is saying that I have to keep the agreement for a minimum of three months otherwise the finance company will want the £500 back from me. Also he wants his commission of course!

Foreversummer

No, he is definitely telling you an untruth there, the commission arrangements are between the dealer and the Finance company and nothing to do with the customers - he is saying that so you will not cancel within the three months and lose him his commission.

If you wanted you know, you could just ask for the extra £500 discount without any HP commitment on your part on the basis that what he is trying to do is not quite ethical and fair?

For example what if Toyota Finance got to hear about what this salesman was up to?

foreversummer

So really, what he is probably doing then is getting me to take out a HP agreement and sharing his commission with me, although he is probably making more than I.

I feel slightly uncomfortable with that, but the bottom line is will it work or will I be left in the do-do not making anything at or or losing out completely. Maybe the dealership have done this before and maybe I will be OK.

The strange thing is he told me that he is governed by the FSA.

Now I really do not know what to do. Am I a money-saving fool to walk away from £500?