Interest on PCP Car Finance

BigEvs23

Hi all,

Hope it's ok to post this here!

Basically I have a query as to how the interest on PCP car finance works.

I bought a car in 2014 for a price of £26,244.27, but put down a deposit of £5,500, so the amount of credit was £20,744.27. The Guaranteed Minimum Future Value is £11,121.41.

I understand that the amount I pay over the 3 years in the difference between the price (after taking into account the deposit) and the GMFV (so £20,744.27 - £11,121.41 = £9,622.86), plus the interest on the finance. But, I was wondering on what amount the interest is calculated? The APR I'm paying is 6.41% over the 3 year term.

I'd have thought that the interest would be based on the £9.6k, so ((1.0641^3)-1)x£9,622.86 = £1,971.63.

But, the actual interest I've been charged is £3,084.78. The only way I can work this figure out is if I remove the deposit from the calculation (i.e interest based on a principle amount of £26,244.27 - £11,121.41 = £15,122.86). The interest I get based on these numbers is ((1.0641^3)-1)x£15,122.86 = £3,098.52 (so not quite the actual amount I've been charged).

Can anyone tell me why the deposit doesn't appear to have been taken into account? Is this ok for finance companies to do this, or have I simply got my maths wrong?

Any help would be greatly appreciated

Thanks

CLAPTON

BigEvs23 wrote: »

Hi all,

Hope it's ok to post this here!

Basically I have a query as to how the interest on PCP car finance works.

I bought a car in 2014 for a price of £26,244.27, but put down a deposit of £5,500, so the amount of credit was £20,744.27. The Guaranteed Minimum Future Value is £11,121.41.

I understand that the amount I pay over the 3 years in the difference between the price (after taking into account the deposit) and the GMFV (so £20,744.27 - £11,121.41 = £9,622.86), plus the interest on the finance. But, I was wondering on what amount the interest is calculated? The APR I'm paying is 6.41% over the 3 year term.

I'd have thought that the interest would be based on the £9.6k, so ((1.0641^3)-1)x£9,622.86 = £1,971.63.

But, the actual interest I've been charged is £3,084.78. The only way I can work this figure out is if I remove the deposit from the calculation (i.e interest based on a principle amount of £26,244.27 - £11,121.41 = £15,122.86). The interest I get based on these numbers is ((1.0641^3)-1)x£15,122.86 = £3,098.52 (so not quite the actual amount I've been charged).

Can anyone tell me why the deposit doesn't appear to have been taken into account? Is this ok for finance companies to do this, or have I simply got my maths wrong?

Any help would be greatly appreciated

Thanks

why wouldn't it be
11,121 x 6.41% x 3
plus interest on 9,622 at 6.41% on the monthly amount decreasing
about £950

BigEvs23

Hi, thanks for your reply, but I'm not sure I follow…

Nearlyold

You pay interest on the total amount you have borrowed ie the price of the car less the deposit.

You haven't just borrowed £9622 you have borrowed £20,744.27

The amount you have borrowed is split into two parts, one part is deferred (the bit with interest added that equals the GMFV) and the other part you are paying down (the £9622). You have mistakenly assumed you only pay interest on the £9622.

BigEvs23

Thanks for the reply Nearlyold.

That's fair enough, but why does it appear I'm paying interest on £15k rather than the £20k?

Nearlyold

BigEvs23 wrote: »

Thanks for the reply Nearlyold.

That's fair enough, but why does it appear I'm paying interest on £15k rather than the £20k?

Because your interest calculation is incorrect. On the part you are paying down you have not taken into account the declining balance, the interest is as Clapton says about £950 not your figure of £1971.

CLAPTON

BigEvs23 wrote: »

Thanks for the reply Nearlyold.

That's fair enough, but why does it appear I'm paying interest on £15k rather than the £20k?

11,121 x 6.41% x 3 = 2,138 approx (3 years at 6.41% )
plus interest on 9,622 at 6.41% on the monthly amount decreasing over 3 years
about £950


so total of about 3,088 aprox

BigEvs23

Ah, the penny has dropped! It now makes sense!

Thanks for clarifying