Don't Be A Flat Rate Fool
When buying a car you need to be particularly careful as most dealerships will quote a flat rate of interest, rather than an APR which most banks use. This mightn't sound a big deal, but actually we're talking thousands of pounds.
It works like this.
- APR Rate: This is the interest you are charged on the outstanding debt. So borrow £5,000 over 5 years and in the first year you'll be paying interest on quite a hefty chunk. However, in the last year you'll probably only have around £1,000 left to pay off, so you'll only be charged interest on this.
- Flat Rate: This means you are charged the interest on the original amount you borrow, no matter how much you have paid off. So with our £5,000 loan over 5 years, even in the last year you're still paying interest on £5,000 despite the fact you've paid most of it off.
So this means if you're offered a flat rate of 6%, which sounds very cheap, it's actually roughly equivalent to an APR of 12% which is way over the odds.
The easy way round this is always ask the question “what is the total amount I will repay including all charges?” and compare like this. In fact car dealership loans are rarely competitive (unless they've an interest free promotion) and you'd be much better off simply going for a normal personal loan.
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