Fixed rate interest

Suzy_P

Hi, I'm a little confused by the interest charged by a major car retailer on the purchase (with balloon) payment, of a car. They say fixed rate, which I understand is £x x % x months = interest due (e.g. £7000 x 3.55% x 36months). BUT, they seem to have added over £340 to the amount of interest due. There are no hidden charges. Have I missed something?

[Deleted User]

Interest is calculated daily. So much higher at the beginning of a loan and low at the end.

iolanthe07

A more accurate interest rate is the APR, which should be somewhere in your paper work. You need to double the flat rate to get an approximate APR, but other charges (documentation fee, etc.) will add to the APR.

Suzy_P

Thanks zx81 and iolanthe07 but I am trying to confirm my understanding of how the fixed rate works. I have an APR, (6.9%) and when compared to online interest calculators, the amount of interest still doesn't match. There are no hidden charges as documentation fees were charged separately. I believe that with a fixed rate the interest is not calculated on the daily reducing balance. I think it is calculated at the full amount for every day of the loan(?) Does anyone else know?

PeacefulWaters

I think you're getting hung up on the flat rate (3.55%) when it's the APR (6.90%) that helps you compare the true cost of borrowing. The APR is the interest rate being charged to a decreasing balance (usually calculated monthly rather than daily).

The flat rate is calculated against the amount borrowed. Not a reducing balance. It's just about never used by banks when explaining the cost of credit and is almost uniquely used in car dealerships to imply that they're cheaper than a bank, when very often they're not.

I'd expect your agreement to show numbers like these:

£7,000.00
equates to 36 monthly payments of £215.82
with an interest rate of 6.90%
repaying £769.51 in interest
totalling £7,769.51.

Does it?

Suzy_P

Ah, Peacefulwaters, thank you,I wish it did. The amount of interest they have come up with, on only a slightly higher loan (£7172.80), is £1131.52.
It doesn't seem right to me. I don't know if it's because there's a balloon payment at the end, though.

PeacefulWaters

Suzy_P wrote: »

Ah, Peacefulwaters, thank you,I wish it did. The amount of interest they have come up with, on only a slightly higher loan (£7172.80), is £1131.52.
It doesn't seem right to me. I don't know if it's because there's a balloon payment at the end, though.

Help us out a bit then and layout the detail of the loan.

Amount borrowed.
APR.
Monthly payment.
Number of months.
Any deferred payment (e.g. pay nothing for three months)
Any other fees up front.
Any other fees at the end.

Is the balloon payment optional in any way?

iolanthe07

The loan interest will include the amount of the balloon payment until it is paid off. You are borrowing all the cost of the car less your deposit.

Suzy_P

PeacefulWaters wrote: »

Help us out a bit then and layout the detail of the loan.

Amount borrowed. 7172.80
APR. 6.9% (3.55% fixed)
Monthly payment. 127.79
Number of months. 36 + final 3703.88
Any deferred payment (e.g. pay nothing for three months) no
Any other fees up front. no
Any other fees at the end. no

Is the balloon payment optional in any way?

only in that I can choose to give the car back instead of paying it.

The figures are shown above, I hope you can help.

Sorry for the delay in replying, haven't been on line much recently.

Thanks

somethingcorporate

Makes sense to me.

Over 3 years your average balance is £5,438.34, half the difference between your starting point (£7,172.80) and your ending point (£3,703.88). You're borrowing over 3 years, so multiply this by 3 and then by your interest rate.

£5,438.34 * 3 years * 6.9% APR = £1,126 interest cost.

The above is a fairly crude way of calculating it as they will do it daily but you see we get to within £6 of each other.

It looks high because you carry the whole of the balloon value through the life of the loan.

Suzy_P

Thanks for your explanation, I haven't seen this way of calculating interest before, and hadn't found anywhere on the internet that agreed with their rate. It's weird though, that this company works it out and reaches that amount of interest, but a different major car finance company matches my calculations.