Have they calculated the interest correctly?

GSMAnon

Hi all,

Took out car finance at end of Feb. £2,700 over 2 years at "interest per year" of 8% (which, apparently, is 28.7% APR based on the assumption that the agreement will last for its intended term and all payments are made when due).

They calculated the total interest to be £432 (bringing the total balance to £3,132) but I'm not sure how they arrived at this number.

Monthly payments are £130.5.

All the loan/amortisation calculators online calculate a different monthly payment and working backwards with the amortisation formula I calculate that to get a monthly payment amount of £130.5 the interest rate would need to be 1.223% pcm, which is 15.7% pa.

What's going on, how did they arrive at that interest and that monthly payment amount?

bigadaj

The fixed interest charged for car loans is frequently around half of the apr, as it doesn't take account of the repayments and reduction in capital of repayments. So eight per cent per year would give you around sixteen per cent apr, and over two years they may translate that as around thirty per cent.

The bottom line is to determine your payments and consider if you can afford and are happy with them before you take the loan out, alternatively ask for more explanation from the finance company.

The other thing is fees, an arrangement fee and or a settlement fee of a couple of hundred quid can make a bug difference when you're only paying a few hundred pounds in interest.

CLAPTON

2700 at 8% for 2 years flat

means 2700 x 8% x 2 = 432 in interest

which seem consistant with 130.5 x 24 payments = 3132
so interest is 3132-2700 = 432 also


the apr is about twice the 'flat rate so arround 16%

in any event the APR and the total payable should be in your credit agreement
what does it say?

GSMAnon

bigadaj wrote: »

The fixed interest charged for car loans is frequently around half of the apr, as it doesn't take account of the repayments and reduction in capital of repayments. So eight per cent per year would give you around sixteen per cent apr, and over two years they may translate that as around thirty per cent.

The bottom line is to determine your payments and consider if you can afford and are happy with them before you take the loan out, alternatively ask for more explanation from the finance company.

The other thing is fees, an arrangement fee and or a settlement fee of a couple of hundred quid can make a bug difference when you're only paying a few hundred pounds in interest.

Ah okay, I get it... I didn't realise it was being calculated as simple interest and I was trying to do my calculations by compounding.

Numbers are working now!

Thanks.

GSMAnon

CLAPTON wrote: »

.

bigadaj wrote: »

.

Another thing...

I want to settle this loan in the next few weeks and according to Barclay's automated service, my settlement amount (valid until 1st July) is £2,564.41.

Do you have any idea how they calculated that?

The total facts of the loan are as follows:

Loaned amount: £2,700
Annual interest: 8%
Total Interest: £432
Facility fee: £150
Completion fee: £199
Monthly payment: £130.5
Purchase date: 29th February 2011

Payments made thus far:

1. 30/03/2012 - £280.50 (monthly payment + facility fee)
2. 01/05/2012 - £130.50
3. 30/05/2012 - £130.50

There are no penalties for settling early.


Am I wrong to say that the calculation for the settlement should be:

Settlement figure = Loan Amount + Interest + Facility Fee + Completion Fee - Payments Made

Where:

Interest = 2700 x 8% x (d/366)
OR
Interest = 2700 x 8% x (m/12)

Where d and m are just the number of days/months between the purchase date and the settlement date?

gingeralan

It all depends really. Best get an explnation from your lender to confirm, your settlement figure will ni dount include the completion fee of 199. Also, sometime car loans are done where the interest is just added to to initial balance, and then any payment come off the total amount. For example in your situation immediately after starting the loan you immediately owe 3132, and any payments come off that, if repaid early you may get a rebate of this interest but this will vary depending on the lender. Best ring em up and speak to someone for a breakdown of the figures.

CLAPTON

the 8% figure has nothing to do with anything; it's simply a crooked marketing device used only by car salemen to make the 'interest' rate seem less than it is.

I've already asked for the APR but you haven't posted

basically the first months interest is 2700 x apr/12

the capital owing for the second month will then be to 2700 - 130 + the interest

so the interest for the second month will be the capital x apr/12

and so on.

GSMAnon

CLAPTON wrote: »

the 8% figure has nothing to do with anything; it's simply a crooked marketing device used only by car salemen to make the 'interest' rate seem less than it is.

I've already asked for the APR but you haven't posted

basically the first months interest is 2700 x apr/12

the capital owing for the second month will then be to 2700 - 130 + the interest

so the interest for the second month will be the capital x apr/12

and so on.

APR was in the original post - 28.7%. But that also takes into consideration the credit facility fee and completion fee, so it's not much use for direct calculation of interest on the borrowed sum.

CLAPTON

then assume 16% APR