PCP Car Loan Front Loaded interest?

seradane

Hi all,

We've recently (5 months ago) taken out a PCP loan on a car. Cost was £21k, put down a £4k deposit, for £17k outstanding credit with APR 9.9%. The total repayable figure in the contract is basically £26k.

I was looking at my credit report the other day and it said the outstanding balance for the loan was £21k!!

I queried this with the financial folks as it's obviously considerably more than we owe in credit, and they've just gone 'oh we use the total figure for all our calculations'. So sure enough it works out that the £21k figure is the £26k figure minus deposit minus repayment so far.

I understand amortization of loans but this is just straight up front-loading? Is this how PCP normally works? My credit score shows more 'debt' than I actually have due to this? If I was to pay it off tomorrow I'd be paying 3.5 years of interest that I shouldn't owe?

Appreciate some insight, thank you!

martinbainbridge1975

the balance on your credit file will show the amount including interest, if you ask for a settlement figure you should find an interest rebate will be applied. also worth looking at the rate on that pcp as 9.9 is a tad high

MorningcoffeeIV

seradane said:

I understand amortization of loans but this is just straight up front-loading? Is this how PCP normally works? My credit score shows more 'debt' than I actually have due to this? If I was to pay it off tomorrow I'd be paying 3.5 years of interest that I shouldn't owe?

No you wouldn't.  There's no 'straight up front-loading'. Or even straight down front-loading.

Your settlement figure will be outstanding capital plus up to two months interest.

Grumpy_chap

This is not front-loading interest.

This is showing your total liability assuming that the loan is managed as per the plan that is set out - your agreed monthly payments for three years plus the balloon payment and any fees (cost to purchase etc).

If anything happens to change the plan that is set out - you miss a payment or you overpay - the total liability that shows will be amended.

If you pay the loan in full tomorrow, you would have first obtained a settlement figure which will be less than the current total liability showing in reports.

Ebe_Scrooge

Front-loading of interest has not been permitted for many years now.  The illustration you're seeing is simply based on the assumption that the loan will run its full term.  Pay it off earlier and you'll see a corresponding reduction in the total amount of interest you've paid overall (allowing for any early settlement penalty, typically 2 month's worth of interest).

seradane

martinbainbridge1975 said:

the balance on your credit file will show the amount including interest, if you ask for a settlement figure you should find an interest rebate will be applied. also worth looking at the rate on that pcp as 9.9 is a tad high

Why do they show the full amount? Obviously with your mortgage it just shows the current amount outstanding, not the total amount due + interest over the life of the loan, so I'm curious as to why it's treated differently. The only other fixed term loan I have was a 0% rate one so can't compare to see if that one would otherwise be indicated the same way.

The website wouldn't let me request a settlement figure as it was undergoing some sort of maintenance so couldn't check that, but will try again another day and have a look.

Yes the 9.9% is higher than we would have liked, but as we were buying "approved used" the dealer claimed they were locked in to their "official" finance rates and had no wiggle room on that, and tbh unsecured loans are just as high nowadays.

Ebe_Scrooge

seradane said:

martinbainbridge1975 said:

the balance on your credit file will show the amount including interest, if you ask for a settlement figure you should find an interest rebate will be applied. also worth looking at the rate on that pcp as 9.9 is a tad high

Why do they show the full amount? Obviously with your mortgage it just shows the current amount outstanding, not the total amount due + interest over the life of the loan, so I'm curious as to why it's treated differently

It's just the way it's reported.  Some loans report the full amount repayable (including forecast interest) as outstanding, others just report the principle without interest.  Largely, mortgages tend to report without interest, personal loans tend to report with interest included.

Remember, when a lender runs their affordability checks, they are primarily interested in how much you are paying each month to a loan.  So whether the overall balance is reported with or without interest is largely irrelevant.  This is for loans, credit cards are reported differently.

seradane said:

My credit score shows more 'debt' than I actually have due to this? If I was to pay it off tomorrow I'd be paying 3.5 years of interest that I shouldn't owe?

Ignore your score, it's meaningless.  And, as per previous comments, if you pay it off tomorrow your settlement figure would be substantially less than the "principle plus forecast interest if the loan runs its full course" figure you're seeing on your credit report.

Grumpy_chap

seradane said:

Why do they show the full amount? Obviously with your mortgage it just shows the current amount outstanding, not the total amount due + interest over the life of the loan, so I'm curious as to why it's treated differently. 

Good question and I don't know the answer - that's just the way it is.
I suppose, with a loan, it more frequently progresses as per plan and, with a mortgage, given the longer timescales there is more often variance.  A mortgage is also secured against an appreciating asset so risk of the lender losing in the event of default is low.  Not sure whether that would have any influence on the way the outstanding debt is shown.

martinbainbridge1975

as stated above ignore your score, lenders use their own criteria you could have an experian score of 995/100 and still get turned down for a loan or card, everyone is likely to fit into different criteria depending on individual circumstances

DrEskimo

Ebe_Scrooge said:

seradane said:

martinbainbridge1975 said:

the balance on your credit file will show the amount including interest, if you ask for a settlement figure you should find an interest rebate will be applied. also worth looking at the rate on that pcp as 9.9 is a tad high

Why do they show the full amount? Obviously with your mortgage it just shows the current amount outstanding, not the total amount due + interest over the life of the loan, so I'm curious as to why it's treated differently

It's just the way it's reported.  Some loans report the full amount repayable (including forecast interest) as outstanding, others just report the principle without interest.  Largely, mortgages tend to report without interest, personal loans tend to report with interest included.

Remember, when a lender runs their affordability checks, they are primarily interested in how much you are paying each month to a loan.  So whether the overall balance is reported with or without interest is largely irrelevant.  This is for loans, credit cards are reported differently.

seradane said:

My credit score shows more 'debt' than I actually have due to this? If I was to pay it off tomorrow I'd be paying 3.5 years of interest that I shouldn't owe?

Ignore your score, it's meaningless.  And, as per previous comments, if you pay it off tomorrow your settlement figure would be substantially less than the "principle plus forecast interest if the loan runs its full course" figure you're seeing on your credit report.

I imagine it would be very difficult to report with interest as it's largely unknown. Fixed rate interests amounts are generally only 2-5yrs, with a variable rate thereafter.