Hire purchase costs help for a financial illiterate!

kaboo

Hi everyone,

I am in a bit of confusion. It might sound like a stupid query but even after being a highly qualified scientist, my brain just doesn't work very well with finance.

2 years ago we got a new used-car with hire purchase agreement. There were lots of things going on in our lives at the time, so perhaps that is why I did not look through the number carefully.

The amount credit we took (purchase price - deposit) was £15,185.00, at the interest rate of 4.8% per annum. The agreement was for 49 months and APR is 4.9% - as listed in the agreement.

The instalments plan as written in the agreement is 1 Repayment of £235.37 followed one month thereafter by 47 monthly Repayments each of £235.37, followed by 1 Repayment of £5,985.00. Adding all this up 17282.76.

Difference between the amount of credit we took and the amount we would pay back would be 2097.76 which is equal to Total Charge for Credit that is indicated on the agreement 

I cannot explain this with 4.9% APR. How does it work? All the calculators I can find online suggest that I am paying a bit too much! I.e. £2097 is not equal to 4.9% APR

Thanks in advance.
Cheers

molerat

You need to look at it as 2 separate loans.  The total borrowed was £15185 made up of an interest only loan of £5985 with the capital repayable at the end and a 4 year repayment loan of £9200.  

So (very rough calculations) the interest on the interest only part would be around £1185 and the normal loan around £883 so £2068 total. Not a million miles away.

kaboo

Wow, thanks. So it was not so straightforward. I wish car dealers would explain it a bit better. Many thanks

MrFrugalFever

You have a Hire Purchase with Balloon finance structure, so as explained above.

If you refinance the balloon payment then you will end up paying even more interest so try to put aside the equivalent to pay in full when the 49 month arrives.

Your total amount payable will include your initial deposit as well as the interest.

fergie_

kaboo said:

Wow, thanks. So it was not so straightforward. I wish car dealers would explain it a bit better. Many thanks

The cynical would say its deliberate, as its a way of letting a customer use a vehicle for a 'low' fixed monthly cost - without the customer realising what the vehicle is actually costing them, or ever actually owning it.

The other factor that muddies the road is what they call the Guaranteed Future Value (or various other names). This is the interest only amount of the loan and varies between makes and dealers. It is the amount that they will sell the car to you for at the end of the term - and also the value they will use, if you decide to 'sell' it back to them. If (as happened after covid) the car is now worth more (than expected), they will often give you the difference back. 

The dealers can make the deal seem more 'attractive' by varying the GFV, interest rates actually charged or the customer 'contribution' quoted.

In some ways it is a hybrid between Leasing and Hire Purchase.