PCP - Hidden costs?

A_Ainsworth

I'm currently negotiating a new car deal with a reputable car company. They currently have an offer whereby they will provide £2.5K discount if the car is part of their "make the switch" deal - confirmed it is, and also will provide a £5k deposit contribution (advertised is split between themselves (£2000) and their parent's financial division (£3,000) if you take their PCP option as finance (6.9%).

So i've been sent a quote, and on close inspection of the deal i have noticed what i think is an issue. The PCP deal is supposed to be 6.9% but when I do the math as per below i think i am being charged more like 11.1%. 

In short i have simply looked at the amount to be financed (discounted price - total deposit (mine plus the 5K from Car Company/Parent), then worked out the full amount to be repaid - (48 months * monthly amount) plus the OFP amount. The difference gives me the effective cost of the finance. Then using a loan calculator i have calculated that borrowing X and paying back Y equates to 11.1% rather than 6.9%.

Now what is really suspicious is the difference in terms of extra payment is more or less £3000, so i am worried that they are effectively getting back the £3K they are saying is a deposit contribution via the finance.

Can anyone help? The company are not playing ball, saying there is nothing they can do as the finance is provided by their Parent company. I've not signed anything yet, and won't be doing until i get my answer, but i wonder if i have uncovered something?

Clive_Woody

Not sure if this is the dealer stating flat rate of interest as opposed to APR. A favourite trick of car dealers

https://www.autotrader.co.uk/content/guides/what-is-the-difference-between-apr-and-flat-rate-when-looking-for-car-finance

DullGreyGuy

A loan basic loan calculator won't work because of the balloon payment at the end that you aren't repaying during the course of the deal... a more advanced calculator could but don't know which tool you used.  If it was a normal loan your repayments would be higher each month meaning the capital is continuously heading to zero so the interest gets less each month. With the balloon its constant throughout the loan so always attracting interest in full

The other thing, as mentioned above, is if they are quoting the APR or flat interest

DrEskimo

The reason the effective APR seems higher is due to the final payment (or balloon payment).

You pay interest on the final payment throughout the full term, but this does not decrease over the term. This is why the monthly cost is lower.

So the total cost of interest is greater than a loan structure without the balloon payment.

Nothing stopping you taking out the deal, benefitting from the deposit contributions, then settling the finance in full either with your own cash, or through another separate finance deal that does not have a final balloon at a potentially lower APR as well.

A_Ainsworth

thanks for the replies, the above is what i have been sent regarding interest.

MrFrugalFever

A_Ainsworth said:

thanks for the replies, the above is what i have been sent regarding interest.

That doesn't look right for a PCP agreement, the fixed rate of interest is normally much lower than the APR, can be up to 50% lower.

Finance arrangements from lenders introduced by brokers within the automotive industry is so heavily regulated I would be extremely surprised if they were trying to pull a fast one. 

Calculating the interest on a PCP is a complex calculation due to the interest accrued on a fixed 'Optional Final Payment' sum deferred to end of the agreement.