Was this loan apr quote reasonable?

chubsta

Unfortunately daughters old banger died so she needed to get a newer, reliable car.

Went through all the sensible budgeting things and found she could get a very nice little car for £15,000, for which she would need a £10,000 loan. She is 20, full-time employed, no debt at all. Did a loan quote with her bank which came back with an APR of 18.1% over 5 years.

I haven't had any loans in a while but remembered my last one had a rate of just over 2% (and yes, I know we wouldn't get anything like that these days!)

So I ended up getting the loan myself, with the same bank as her, at 5.9%, which she will (hopefully!!) pay me back over the five years - I am aware of the risks of lending money to family etc etc but that's not an issue.

So, to my question - was the original 18.1% quote 'reasonable' in today's market? It seems very high to me but I'm guessing as she has no credit cards/debt/sim-only phone contract/existing loans/store cards then her 'credit score' will be low and they didn't really want to take the risk, or is that how much people really pay for loans these days?

prettyandfluffy

The quote that your daughter got sounds very high to me.  Despite all the warnings about lending money to family & friends, I did the same as you when my niece wanted her first car.  Getting some of the payments was a bit like pulling teeth but she did pay it all back, albeit over a longer timescale than originally agreed.

CliveOfIndia

It does sound a little on the high side, but without knowing her particular financial circumstances and credit history, it's anyone's guess as to whether it's reasonable or not.

chubsta said:

I'm guessing as she has no credit cards/debt/sim-only phone contract/existing loans/store cards then her 'credit score' will be low and they didn't really want to take the risk

This will very likely have been one factor - without any credit history to go on, a lender has no way of really assessing an applicant's likelihood of repaying.  They're essentially taking a punt on a largely unknown risk, so will price the loan accordingly.  Although, her actual credit score as determined by the CRAs has no bearing whatsoever - especially as it's not even visible to a lender.

chubsta said:

So I ended up getting the loan myself, with the same bank as her, at 5.9%

That's probably because you have a much longer and more solid credit history, so the lender assessed you as being less of a risk.  Unfortunately it's always a bit of a Catch-22 - it's very difficult to get credit unless you've had credit before, and proved your ability to repay.

chubsta said:

found she could get a very nice little car for £15,000

There are plenty of decent cars available for half that price or less.  It's not my place to advise people on what they should spend their money on - but if she's having to take out a loan to finance the purchase, it may be more prudent to look for a cheaper car initially, then start saving ready for when she eventually needs to buy a replacement.

MattMattMattUK

chubsta said:

Unfortunately daughters old banger died so she needed to get a newer, reliable car.

Went through all the sensible budgeting things and found she could get a very nice little car for £15,000, for which she would need a £10,000 loan. She is 20, full-time employed, no debt at all. Did a loan quote with her bank which came back with an APR of 18.1% over 5 years.

I haven't had any loans in a while but remembered my last one had a rate of just over 2% (and yes, I know we wouldn't get anything like that these days!)

So I ended up getting the loan myself, with the same bank as her, at 5.9%, which she will (hopefully!!) pay me back over the five years - I am aware of the risks of lending money to family etc etc but that's not an issue.

So, to my question - was the original 18.1% quote 'reasonable' in today's market? It seems very high to me but I'm guessing as she has no credit cards/debt/sim-only phone contract/existing loans/store cards then her 'credit score' will be low and they didn't really want to take the risk, or is that how much people really pay for loans these days?

Yes, she is young, no assets, looking to borrow to spend on a car, statistically that is a high risk loan for the bank. Additionally your daughters credit record will be light, she will not have been able to build up a long term track record of meeting her obligations on time, no mortgage, no property, no assets to seize via recovery action, her loan to income ratio is likely not in the idea window etc. 

You are older, more established, likely have a record of meeting all your multiple obligations over many years (mortgage, utility bills), older people are statistically less likely to default than younger people etc. hence the difference in rates offered. 

chubsta

Cheers for the replies - I was thinking her lack of established credit repayments would be an issue, something we will have to look at soon as she will be looking to buy a house at some stage. Terrible really that you are kind of forced to take credit in order to prove you can pay it back but I guess it makes sense from a lenders point of view.

As an aside, her first car was an old banger which has cost twice as much to repair than it did to buy so as she needs a nice reliable one with a very long warranty we all felt she should get something almost new that she will hopefully not have to worry about for the next 7 years, she really is disheartened by paying out for expensive repairs only for something else to go wrong.

anyway, we will work towards ensuring that she has a decent credit history going forward - that fine line between using credit but not actually having any debt!

chubsta

chubsta said:

found she could get a very nice little car for £15,000

There are plenty of decent cars available for half that price or less.  It's not my place to advise people on what they should spend their money on - but if she's having to take out a loan to finance the purchase, it may be more prudent to look for a cheaper car initially, then start saving ready for when she eventually needs to buy a replacement.

We were kind of forced into the change of car - following a repair bill of £600 in December we were looking at another of £1000 this month on a car which realistically has no sale value. She could have spent less on the new one but who knows what problems it would have? She is getting a Kia with 6.5 years warranty left on it and all the tech she wants so I think £15000 is reasonable given her situation. If her car hadn’t broke again she would have been happy to keep it but it was always on borrowed time before something else went wrong. Although the loan is £10,000 for five years I think she will have it paid back in under 3 easily as she is very financially motivated - the reason she didn’t use savings  beyond the £5000 deposit is because most of her money is tied up in either isa or fixed term savings at decent interest rates and not immediately accessible, and she didn’t want to use all of her accessible money up ‘just in case’ - seemed reasonable to me…

DullGreyGuy

chubsta said:

Cheers for the replies - I was thinking her lack of established credit repayments would be an issue, something we will have to look at soon as she will be looking to buy a house at some stage. Terrible really that you are kind of forced to take credit in order to prove you can pay it back but I guess it makes sense from a lenders point of view.

It's all about verifiable history... what they can get from the CRAs is almost certainly correct. It shows how much others have trusted her in the past and how well she has done with that trust. 

Banks will obviously ask other questions like your salary and/or rent etc but they cannot electronically verify those things other than seeing how you answered the same questions previously. They could ask for documents but we are then in the space of humans having to look at stuff which is relatively expensive, especially if you want them to have tools to ensure the documents haven't been doctored. Plus they may not tell the whole story, payslips are great to show what someone got paid last month, won't show that they quit last week or they're a temp ending tomorrow. 

Credit doesnt have to cost you anything though... get a credit card, set up the DD to clear it in full every month and buy a couple of things you normally would each month on the card. Quickly you start showing you haven't gone wild and you're making repayments on time. Clearing the balance in full means no interest is charged. 

Various other options exist with no additional costs like a contract mobile 

QrizB

chubsta said:

..  most of her money is tied up in either isa or fixed term savings at decent interest rates and not immediately accessible,

Agree she should keep an emergency fund, but unless her savings are paying more than 5.9% she's likely to be worse off with the loan.

R_P_W

Whether anybody thinks borrowing £10k at 18% APR for 5 years on a depreciating asset is reasonable or not I can add my opinion that it is financial insanity. Over the 5 years would be paying £5k in interest alone. At 20 years old unless she has some specialist requirement in terms of size etc why not go and buy a car for £5-8k where can either pay without needing a loan on at least a small one?

5.9% is decent in todays market, but in a way all it has done is firstly put your money at risk which YOU are now responsible for paying back and not her and set the expectation that financing cars is a the norm (which I appreciate it is very common, but it will be a constant ball and chain)

chubsta

I agree that the interest rate she was offered is totally unreasonable, but the question was really about whether it was 'reasonable' given her total lack of credit history and to be expected.

Regarding the purchase of the car itself, she has been driving around in an old car which was very cheap to buy but which has cost her massive amounts in repairs, to the point we were fed up throwing money at it. Getting a very nice, basically brand new car with all the bits she wanted on it means we don't have to worry as much about her breaking down in the middle of nowhere at night etc so that in itself is worth a lot. Although I took a loan out to pay for it for her she is very committed to paying it off - the loan is for 5 years and we have calculated she should have it paid off in just over 18 months, leaving her with a (hopefully reliable) car she owns, that will still have about 5 years warranty left, and which she will probably not want to change for at least a further 7-10 years after that. Sounds pretty good to me! 

Regarding putting my money at risk - it isn't at risk as she will pay me back, absolutely no doubt about that. And if she didn't, well to be honest I wouldn't miss it, I could have just given her the money but it is sat in an account at 5.89% so the difference between the interest rate I get on it and the amount on the loan is 0.01%...

Purchasing a car is only a 'constant ball and chain' if you spend ages paying it off and then change it and start again as soon as you have - they cost so much these days there is no problem in getting a loan at a decent apr and then paying it off early if you then hold onto the car for many years afterwards.