Difference between flat rate and APR?

zipman23

I've just bought a new car and as it was more expensive than previous cars that I paid cash for, I decided to get it on finance. I traded my old car in for £1500 and have taken around £6200 on finance.

I asked what interest rate I'd be paying and was told that they work off a flat rate of 6%, which, to me sounded pretty decent...at the time

I had to go back to the garage to re-sign some forms (because the finance company wouldn't accept my 'new' signature compared to the one on my drivers licence which I got when I was 18) and I noticed that the rate was 13.9% APR. I did question it but was again told that I would be paying 6% interest!

What is the difference? I've been into a few banks today where I've been working to ask the difference but it was quite early and I don't think they were fully awake as they didn't exactly know but when I told them the APR, they said that was quite a decent rate 'nowadays'.

Can anyone advise me as I've never taken a loan out for a car so not sure whether I've been diddled or not!

Cheers

CLAPTON

lets suppose you borrow 6000 over three years at 13% apr that would cost you about 200 pm or 7,200 in total

well those cunning people in the car shop say the interest is 1,200 over three years
or 1200/3 per annum i.e. 400 per annum or 400/6000% or about 6.6 % FLAT rate

it looks a lot better than 13% and very common in car sales

Consumerist

In general, the flat rate is usually around half the APR because your balance on the loan is decreasing throughout the term from the amount you borrowed at the beginning to zero at the end.

This is really only a rule-of-thumb but is reasonably accurate in most practical situations, as can be seen from CLAPTON's example above.

iolanthe07

It is common practice among car dealerships, but I'm surprised they're allowed to get away with it. Everyone else has to declare the APR clearly.

JosselinD

Calculating a flat rate as per CLAPTON's example is totally misleading and doesn't reflect the cost of your credit at all. You should only pay attention to the APR.

I am a little surprised that you had to go to the shop for a paperwork related matter and only there you've been given the APR. Showing the APR isn't an option for loan providers. Considering their poor way of doing, one might assume their APR 13.9 is probably not legally compliant.

Do you have to pay any fees in addition to the interest?

nomoneytoday

Flat rates are easier for a salesman to work out on a calculator when solving monthly payment questions, but the APR will be quoted in the Key Facts.

The difference comes from the flat rate being charged on the original debt amount all the way through, where as the interest in the real world reduces as your debt goes down

staffiecat

The exact same thing happened to my husband recently when he purchased a new car. The dealer kept telling him that he was giving him an excellent flat rate of 7%. When they discussed the monthly payments he realised that there was some inconsistency as they were £30 higher than expected but again the dealers had that one covered by saying that those included the various charges for the credit etc and again they emphasised that this was the best deal on the market because it was a flat rate of 7% :mad:

On signing the paperwork he noticed in the small print that the APR was 14 % When he queried this he was told that it was simply how the banks worked out the equivalent value but he was not being charged 14% interest, he was only being charged 7% interest. Note here that the use of the word interest is probably how they cover their backs !

Its outrageous that this is legal practice, regardless of whether he could have got a better deal elsewhere these dealers are misleading the customer. They are playing on the fact that customers do not know the difference between flat rates and APRs.

I don't think that there is any comeback on this though, as an agreement signed in the dealers offices is legal - regardless of the misselling involved. Although others will know more about the legalities.

S

zipman23

Thanks for the replies/advice,

The finance agreement over the 5 years comprises:

Interest: £2070.60
Credit Facility Fee: £149
Completion Fee: £149

Rate of Interest on the Credit 6.4% p.a

Is 13.9% APR still a good deal over 5 years as the staff in the banks suggest and they also said that there should be a 30 day cooling off period so providing I act quickly and can get some other finance arranged I might be able to sort it out!

djgandy

This happened to my girlfriend yesterday. The guy seemed to have little understanding of what he was on about under examination and did not give an APR figure. He also joked that APR actually goes up on flat rate loans as you decrease the payment period. A subtle trick which may fool many into thinking a longer payment period would save them money.

In my eyes he missold a loan, it's no wonder people struggle with debt if these people can just sign you up to loans they barely understand themselves.

My question is though, can she now apply for another loan from a bank? All bank loans offer better deals. The savings will be around £400 by switching to a 8-9% bank loan.

What are the implications of applying elsewhere? I wouldn't want her to get rejected or for it to complicate the current loan situation.

I'd advise the OP to apply else where if people think this is a good idea.

Thanks, Andy