In a PCP car loan or any other loan, annual interest rate is used for calculating your monthly installment. This rate is also known as APR (annual percentage rate). Annual interest rate determines how much extra you are going to pay over the total principal owed.
Suppose you are considering to buy a Peugeot 208 under PCP. Car price is £9,895, and you are being asked to pay a deposit of £1,000. Final payment or GMFV is £4,035.78. For the term of 36 months, you are being offered an annual interest rate of 19%. Using this interest rate, you will get a monthly PCP payment of £178.77. If the interest rate is higher, the monthly payable, your total interest paid, and your total amount borrowed will increase.
You may notice that for the same car, the advertisement may show an APR or annual interest rate of 4.9%. However, as part of the actual deal, your interest rate is much higher. This 4.9% is typical or representative APR. However, like in the case above, it is not necessary that the car loan provider may charge you as per the representative APR. They will determine your APR or annual interest rate on the basis of your credit history, your financial situation, and your total principal owed. So if you borrow a lower amount, you will have to pay a higher annual interest rate. Similarly, if your credit history is weak, your interest rate will be more than the advertised annual interest rate.
You want to buy a Ford Fiesta Hatchback under PCP. Car price is £13,057. The advertisement shows a representative APR of 7.4%. At this annual interest rate, your monthly payment may be £182.34. However, if, suppose your recent credit history has not been great, you may have to accept a higher APR of 10%.
Your annual interest rate is a key component of your loans. The lower interest rate can mean lower monthly PCP payments, lower total interest paid and lower total amount borrowed. However, you need to note that a lower annual interest rate is not always the final word. Between two dealers, one of them may offer you a lower annual interest rate but you may still be at a loss because of a higher car price or a lower GMFV. At times, the interest rate may be higher but there could be a dealer contribution, which can make the deal better for you.
We recommend you to use our PCP calculator and do your own calculations. You can see how different annual interest rates can impact your overall car loan finances.
You should note that annual interest rate is different from a 'flat rate' offered by some dealers. The flat rate is much lower, and you should always insist on an APR or annual interest rate while purchasing a car.