Understanding loan interest rates....

manofdogs

I have a quote from Close Brothers for a car loan.  £6,495 over 5 years at 9.25% (applicable on a per annum basis). Total finance interest is coming in at £3,166  - which is approaching 50% of the amount to be borrowed!  When I put these numbers into any loan calculator the interest payable is coming out at  £1641.00  How are Close Brothers doing their calculations that is different from a standard APR?  

Mark_d

With a standard loan, where you repay interest plus principal each month, £1641 sounds like the correct figure.  O average you're paying 9.25% interest on roughly half of 6495 for the 5 years.

£3166 suggests you're paying interest on the entire 6495.  That would mean you're paying the interest each month but you're repaying the principal at the end.  It's basically like an interest-only mortgage

MyRealNameToo

manofdogs said:

I have a quote from Close Brothers for a car loan.  £6,495 over 5 years at 9.25% (applicable on a per annum basis). Total finance interest is coming in at £3,166  - which is approaching 50% of the amount to be borrowed!  When I put these numbers into any loan calculator the interest payable is coming out at  £1641.00  How are Close Brothers doing their calculations that is different from a standard APR?  

first of all, is the 9.25% listed as APR or another form of interest?

If thats the simple interest not APR/Compound and its compounding daily then that would come out at similar numbers to Close numbers

Exodi

manofdogs said:

I have a quote from Close Brothers for a car loan.  £6,495 over 5 years at 9.25% (applicable on a per annum basis). Total finance interest is coming in at £3,166  - which is approaching 50% of the amount to be borrowed!  When I put these numbers into any loan calculator the interest payable is coming out at  £1641.00  How are Close Brothers doing their calculations that is different from a standard APR?  

The first figure is around what it would be if the principal is not reducing over the lifetime of the loan.

This should also be obvious, as your payment would only be around £50. Over the 5 years you'd pay around £3k in interest but still owe the original £6,495 at the end.

If it was a typical 5 year loan, the payment would be around £136. Over the 5 years you'd pay around £8,136 (of which £1,641 is interest as you say).

EDIT: sorry should have read the comments as Mark_d has identified this also.

The interest only mortgage comparison is a great one.

Unfortunately, unlike houses (where people have sometimes been able to pay off the original balance and profit due to house price increases), cars nearly always go down in value over time, so I'd personally steer clear of a deal like this (as you will eventually be faced with a situation that you need to find £6,495, but the car might only be worth £4k). I don't expect you'd beat a guaranteed 9.25% anywhere else with the money either.