PCP Interest calculation?

bailey_uk

Hi folks, I try and be as financially savvy as possible and I am shocked to work out how expensive it is in interest to have PCP finance once ive done a few sums!
Would anyone be able to describe to me how they come to this crazy amount..?
Basically, new car price £23,795
Deposit £10,000
Amount needing finance is therefore £13,795
The interest is 6.86% fixed
Opening balance of loan would be a whopping £16,435
I make that to be £2,640 interest over 36 months.
So basically my question is, how do they get to this number? Ive typed all sorts into my calculator and still cant work out how it can be so high!

Many thanks

JB

ps, other bits of info are that the payments would be £109.66 and final payment £12,597

This would then make the amount I have paid in 36 months to be £3947.76

If I deduct £3947.76 off the total amount loan amount of £16,435 then it means that in 4 years, I have only paid £1307.76 off off the car! 

Edi81

All of this would be on the copy of the credit agreement when you took out the PCP.  Lesson here is to read before you sign. 

jonesMUFCforever

Funny thing is that user   nw04jen asked a very similar question today.

Jami74

You are being charged interest on £13,795.
At the end of the first month at 6.86% the interest accrued would be about £78.87 (13.795 x 0.0686/12). Then you'd pay £109.66
You will then owe £13,764.21. (Balance + interest - payment) Interest accrued at the end of the second month would be about £78.69. Then you'd pay £109.66
You will then owe £13,733.24. Interest accrued at the end of that month would be about £78.51. Then you'd pay £109.66 etc.
At the end of 36 months you'd still owe £12,597 because each month the debt would be accumulating more than £70 interest so your £109 payment is mostly paying off the interest, only about £30 is reducing the principal. (The figures are only approximate as they will depend on how many days in the month and at what point of the month you make the payment).

bailey_uk

Edi81 said:

All of this would be on the copy of the credit agreement when you took out the PCP.  Lesson here is to read before you sign. 

Yes this is true.
It was a few years ago and after a short while I realised my mistake and I swapped it for a bank loan which is nearly finished. 
My reason for posting this today was to gain a better knowledge of how such a big amount of interest was worked out, and to make a much more informed decision for my next car ;-)

jonesMUFCforever said:

Funny thing is that user   nw04jen asked a very similar question today.

Ha yes I have just seen this now, I didnt read the thread as I didnt know what the title meant!

CSL0183

bailey_uk said:

Hi folks, I try and be as financially savvy as possible and I am shocked to work out how expensive it is in interest to have PCP finance once ive done a few sums!
Would anyone be able to describe to me how they come to this crazy amount..?
Basically, new car price £23,795
Deposit £10,000
Amount needing finance is therefore £13,795
The interest is 6.86% fixed
Opening balance of loan would be a whopping £16,435
I make that to be £2,640 interest over 36 months.
So basically my question is, how do they get to this number? Ive typed all sorts into my calculator and still cant work out how it can be so high!

Many thanks

JB

ps, other bits of info are that the payments would be £109.66 and final payment £12,597

This would then make the amount I have paid in 36 months to be £3947.76

If I deduct £3947.76 off the total amount loan amount of £16,435 then it means that in 4 years, I have only paid £1307.76 off off the car! 

Amount of credit = £13,795
Amount of final payment = £12,597

So over the 36 months you can only ever pay down that £1,198 difference. The rest will be interest. Remember, with a PCP, you’re paying interest on that £12,597 for 3yrs and that balance never reduces hence why the majority of your monthly payment will be interest. 

You could try for a lower final payment by exaggerating the mileage, instead of 10k, ask for 25-30k. This will drop the final payment which means you’ll pay more of the capital off. 

Or you could forget the PCP and just buy the car outright with a much lower interest rate (but higher monthly payment)

bailey_uk

Jami74 said:

You are being charged interest on £13,795.
At the end of the first month at 6.86% the interest accrued would be about £78.87 (13.795 x 0.0686/12). Then you'd pay £109.66
You will then owe £13,764.21. (Balance + interest - payment) Interest accrued at the end of the second month would be about £78.69. Then you'd pay £109.66
You will then owe £13,733.24. Interest accrued at the end of that month would be about £78.51. Then you'd pay £109.66 etc.
At the end of 36 months you'd still owe £12,597 because each month the debt would be accumulating more than £70 interest so your £109 payment is mostly paying off the interest, only about £30 is reducing the principal. (The figures are only approximate as they will depend on how many days in the month and at what point of the month you make the payment).

This is exactly what I was looking for...
I looked and couldn't see anything else online which describes it in this way, thanks!

Jami74

bailey_uk said:

This is exactly what I was looking for...
I looked and couldn't see anything else online which describes it in this way, thanks!

There's a special name for the type for it but I can't remember what it is. This link 
https://www.scribd.com/document/394673531/Tf-062062831
you can download an excel spreadsheet where you input the numbers and it shows you interest and stuff. 

bailey_uk

CSL0183 said

You could try for a lower final payment by exaggerating the mileage, instead of 10k, ask for 25-30k. This will drop the final payment which means you’ll pay more of the capital off. 

Or you could forget the PCP and just buy the car outright with a much lower interest rate (but higher monthly payment)

Yes that is an interesting point to make about the lower final payment... because I have noticed that the sale person tends to call this the 'Guaranteed Future Value' and uses this as a smoke screen to try and make you think that a higher figure here is a better one!

DrEskimo

bailey_uk said:

CSL0183 said

You could try for a lower final payment by exaggerating the mileage, instead of 10k, ask for 25-30k. This will drop the final payment which means you’ll pay more of the capital off. 

Or you could forget the PCP and just buy the car outright with a much lower interest rate (but higher monthly payment)

Yes that is an interesting point to make about the lower final payment... because I have noticed that the sale person tends to call this the 'Guaranteed Future Value' and uses this as a smoke screen to try and make you think that a higher figure here is a better one!

Well it's a balance between expected depreciation and interest payable.

The finance house won't want a GFV too high as then they are exposed to loses if the cars value is much lower, as you will simply hand it back to them.

In this example though, taking a PCP is costing you £2,640 in interest, so the car would have to be worth less than £10,000 before you saw any economic benefit of just handing the car back (the GFV minus the interest you are charged). If you think this is unlikely, and can afford a higher repayment, a straight loan would be more financially savvy.

Even at 6.8%, a personal loan would cost £1,447 in interest, thereby saving you £1,200. If you can get a lower APR of 3%, then the interest would only be £638, thereby saving you £2,000. This would increase the monthly payments to £440 and £400 respectively.

At the end you are free to trade the car in for the predicted £12,597 just as you would at the end of the PCP (assuming this is what it's worth trade value), or better yet, just keep it knowing you have paid it off in full and now have £0 per month.

[Deleted User]

bailey_uk said:

CSL0183 said

You could try for a lower final payment by exaggerating the mileage, instead of 10k, ask for 25-30k. This will drop the final payment which means you’ll pay more of the capital off. 

Or you could forget the PCP and just buy the car outright with a much lower interest rate (but higher monthly payment)

Yes that is an interesting point to make about the lower final payment... because I have noticed that the sale person tends to call this the 'Guaranteed Future Value' and uses this as a smoke screen to try and make you think that a higher figure here is a better one!

GFV or GMV is the price that they want you to think about as a big deposit on another PCP deal to keep you in a cycle of keeping up with the Jones and getting a new car every 3 years. Paying off the balloon and keeping the car is the way to avoid this endless cycle of wasting money that many are tempted by. I got a new car on PCP albeit on 0% interest, amazingly no-one cares it is now 6 years old and I don't have to worry about the depreciation nonsense as I am not hoping to use it as a deposit or sell it off, I'm just using it as a car is intended to be used.