Interest Rates

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APR v’s Flat Rate

It is a Legal requirement that all lenders quote the APR of a loan. This “Annual Percentage Rate” takes into account any setup charges (possible) and final charges (less likely) as well as the cost of borrowing the money. It usually works out at about double the “Flat rate” of the loan. It is supposed to make loans more “transparent” – but it doesn’t, in fact it rather complicates things because apart from comparing two loans’ APRs, it is difficult to do any other meaningful comparisons or calculations with the APR figure.

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Fortunately, when most car salespeople talk about the Interest rate what they are actually referring to the Flat rate. BE CAREFUL – they often do this to make their finance appear cheaper than the interest rate of, say, a bank loan. Banks always quote the APR of their loans – car dealers generally quote the flat rate! You can't compare them, the flat rate will always be a lot less than the APR.

The Flat rate is the actual interest rate you are being charged to borrow the money, and it shouldn’t be much above the current bank rate. Of course, it doesn’t take into account any extra charges but if you know that there is a, say, £80 “set up” fee at the beginning of the loan, all you need to do is take that into account when you are working out what the deal is going to cost you overall. It really is better to concentrate on the flat rate of a car loan because then you can easily check what you are being offered.

What is “Typical” APR?

There is not, always, one rate for all.

Different lenders assess the risk in lending money to people in different ways. Some lenders advertise an APR rate and ALL successful applicants will get that rate. Other lenders operate a “risk-based pricing policy” for their loans – if you are seen as a higher risk than the average person then the rate that you will get offered will be higher.

So, the interest rate you might be offered depends on how much of a risk it would be to lend you money, based on your credit rating (following a credit search) and personal circumstances. If you are thought to be more of a risk than the average person then you won’t get offered as low an interest rate as the average person. If you are shown to be a better risk than the average person you may even be offered a lower rate than the “typical” APR.

Factors showing that you may be more of a risk include: County Court Judgements (obviously!), frequently changing jobs, not a home owner, haven’t had a bank account for long, are not on the Electoral Register etc. You can find out more information about this from any credit search company.

Whenever the word “typical” is used it means that the APR being quoted is offered to at least 66% of successful applicants. You may, or may not, fit into this category.

Notice, above, we have used the word successful twice. Lenders only lend money to applicants that they WANT to lend money to! In order to advertise a really low “typical” APR, a company might only accept applicants that fit into a particular low-risk “profile” and the majority of applicants might get turned down, making it much easier (and legal!) to advertise the especially low rate.

With these lenders, you will only know for sure what interest rate you will get offered once you have applied, but, each time you apply for a loan a credit search is done on you and this leaves a “footprint” in your credit history and the more of those you have ALSO adversely affects your credit rating! You should really find out about the lending policy of a lender before you apply to them for a loan – do they operate a “risk-based pricing policy” or not? If they do, you may not get the rate that you assumed.

Beware Weekly Repayments!

There are now a lot of car dealers offering and quoting weekly repayment figures (rather than monthly) for car finance. One of the ideas behind this is that it is easier for you to work out your budget, particularly if you get paid weekly.

However the bad news is that, in the heat of the moment, you might actually end up paying MORE per month than you realised! It seems obvious when you read this but: - a weekly figure of, say, £75 per week is NOT the same as £300 per month. £75 per week is actually £322.50 per month (there are more than 4 weeks in a month so you have to multiply the weekly figure by 4.3).

This may not seem a big difference but it can make a huge difference to what you end up borrowing…

Let’s say the Term is 3 years (36 months) and the Rate is 5%. If you agree to a loan where the monthly repayments were £300 then it means that you have borrowed £9,391.30. On the other hand, if you had agreed to a loan where the weekly repayments were £75 that means you have borrowed £10,095.65. You have just borrowed £700 MORE. In other words, you have ended up paying £700 more for your new car than you thought! If that wasn’t bad enough, you will end up paying an extra £105 in interest! So overall, it has cost you an extra £805 for your new car!

If you are being quoted weekly repayments always multiply this by 4.3 to get the correct monthly equivalent!

Now see the next section and find out why zero percent finance doesn't exist...

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