Graham Hill is well-known for making provocative statements which divide opinion. Here’s what he had to say recently on the worth of APR when it comes to acquiring a car, which Motor Finance put to the manufacturer-owned side of the industry, represented by Doug Gillies of Toyota Financial Services and Steve Gowler of RCI Financial Services.
APR: ‘a useless acronym’?
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A customer was asking about the technical spec of a particular car a few days ago. I gave him the fuel consumption, CO2 output, top speed and 0-60 acceleration time thinking that was all he needed. But he came back and said: "Graham. You missed off the BHP, what’s the brake horse power?"
As it turned out, it was 115 and the manufacturer, when creating his price list, thought it was so important that he even included it in the model name. But the fact is that the information is about as useless as a chocolate teapot – it is totally meaningless.
Think about it, what does brake horse power mean? Does it signify the strength of the brakes on the car? No, and for most drivers it may sound important, but it isn’t when compared to the other key information. Some just use the expression ‘horse power’, so what is the difference and does that mean the car has the power of 115 horses?
And what does that mean anyway? It doesn’t describe its acceleration or its top speed. In fact there are some cars with a higher BHP that have a slower acceleration and top speed than a car with lower BHP.
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By GlobalDataIt might sound important but for the majority it is totally meaningless. The same applies to APR.
With around a third of the population struggling with the meaning of interest it’s not surprising that most consumers and businesses haven’t a clue when it comes to the true meaning of APR and how they are constantly manipulated by lenders, shops, car dealers, brokers and the press.
The danger in APR
Even the meaning is misunderstood. Ask the man in the street what APR is and the answer in most instances would be ‘interest’. APR stands for Annual Percentage Rate; in fact this isn’t strictly true because it stands for Annual Percentage Rate of Charge.
Read it as many times as you like, but there is no mention of interest. It is a useless piece of information that played a large part in the financial meltdown that started in the USA when those that couldn’t afford repayments on properties were seduced by toxic, apparently low APR rates.
Instead of being given the truth about costs and repayments these high-risk customers took out mortgages and car finance that couldn’t be repaid. APR is dangerous; it doesn’t allow you to compare products and has no obvious bearing to the amount being charged. Borrow £1,000 at 10% APR (with no charges, just interest) over 12 months and most people would assume you will pay £100 in interest. In fact you would pay £55.04 – bloody useless.
Which brings me to the latest con to be offered by many dealers, the 0% APR deal.
This isn’t new, it’s been about for years, but what is the dealer/captive giving away? And why do consumers fall for what is, in many cases, a con?
OK, before readers jump out of their prams, I have seen some genuine deals where the car has been discounted, only 25% deposit required and the balance payable over three years and I applaud this scheme, but generally they are nothing like it.
The car is charged at full retail price, a 50% deposit is required and the balance is repaid over 24 months. On a £10,000 car this can represent around £300 or less in cost to the manufacturer and yet the customer would take the 0% APR rather than negotiate a discount. It’s all very confusing because we have all been brainwashed when it comes to APR.
Another twist
Decisions should never be taken simply on the comparison of APRs and there is one more twist to the 0% APR con.
I have read, on many occasions, reports in the national and car press where illinformed reporters suggest that car-buyers should forget the 0% APR, negotiate a substantial discount on the car along with extras like carpet mats and a full tank of fuel thrown in, then take out a personal loan at a low APR.
First of all, a personal loan flushes a load of legal rights, provided under the Consumer Credit Act, down the toilet and, secondly, why take out a loan when you are entitled to all the discount and extras negotiated while claiming the 0% APR?
The law is quite clear that if you take a car on 0% APR you should be no worse off than had you bought the car for cash. So there you have it, how to out-con the con man!
To save any confusion, anyone taking out any finance should totally ignore APR and decide whether they can make the repayments comfortably, what their contractual commitments are, what the total cost is, including interest and all charges, and what their legal rights and obligations are.
Once they’ve done that and are happy, so the provider should be – without the need to con anyone.
Graham Hill is director of GHA Finance
Dealers are free to discount margin
Consumers nowadays are much more aware and have a better understanding of interest rates. 0% and low APRs are commonplace.
Most consumers are aware of interest rates on deposit accounts and can relate this to the cost of borrowing. Representative APR is the rate that is legally prescribed to be used for comparison purposes in advertising by the Consumer Credit Directive.
There is also a requirement to include in advertisements a rate of charge as well as the representative APR and in our case we use fixed rate of interest (per annum).
Attracting new customers
In the current climate, where money costs have been low for a number of years, the attraction of low rate / 0% offers has increased. This gives the consumer a strong affordability message.
On new vehicles manufacturer / finance companies support the finance offers to attract new customers to their brands.
Deposit requirements on 0% offerings over the past few years have reduced significantly.For example, Vauxhall offers 0% deposit over five years, and Toyota Financial Services offers 0% APR with a flexible deposit of between 0% and 20% on its AccessToyota PCP.
As the name suggests, this gives all customers access and affordability to the brand. Toyota dealers are free to use the margin they have in our Toyota cars as they see appropriate. Customers are free to negotiate with our dealers whether they are buying a car on 0% APR or not and Toyota dealers can choose whether or not to use their margin to discount the car, offer extras or over-allow on part exchanges.
We do not advertise 0% APR offers as an alternative to a discounted price.
Excellent value
There has never been a better time to buy and finance a new car. The industry is providing excellent value for money with the vehicles on offer and the finance solutions.
Every manufacturer’s website supports the sale by attracting customers through accessibility and affordability which are significantly more competitive than the personal loans on offer and do not vary dependant upon status.
Doug Gillies is managing director of Toyota Financial Services
APR allows customers to make comparisons in a buyers market
I agree that anybody taking out finance should consider a whole range of factors before making their final decision, rather than just focusing on the APR.
I don’t, however, agree that potential finance customers should totally ignore the APR as it does enable them to make some degree of comparison between different offers and providers.
For me, it’s a fairly straightforward way of representing the interest and charges on a finance agreement and, as such, I don’t see why, when taken as just one thing a potential finance customer should take into consideration, it could be described as useless and
dangerous.
For me, a 0% APR deal on a car is the least likely thing that could be regarded as a "con". Although, for convenience, most manufacturers advertise 0% APR offers at full retail price, the reality is that most 0% APR deals are transacted at a price below full
retail price.
As far as I am aware, there are no 0% APR offers on cars that are conditional upon the customer paying full retail price. The reality is that most of the customers taking 0% APR finance on cars are effectively cash buyers or those with significant equity from their part exchanges.
They are happy to take advantage of the fact that they can utilise someone else’s free money to purchase part of their car, rather than use their own.
The way that 0% APR finance has to be advertised under the Consumer Credit Act makes it completely transparent. As such, the minimum deposit and term are clearly stated in the body of the advert and the 0% APR figure quoted is a pure interest rate with no added changes being applied (it’s the only time that the Per Annum Flat rate and APR are identical).
Of course a consumer should make sure that they get the maximum discount that they can negotiate regardless of whether there is 0% APR finance on offer or not.
The fact is that, in today’s climate, it’s a buyers market and I cannot imagine that there are any customers taking 0% APR finance who are not also demanding a significant discount.
In summary, 0% APR finance is, for a particular segment of car buyers, a very attractive and transparent proposition. This is evident from the huge number of new carbuyers who take advantage of it when it is offered.
Steve Gowler is managing director of RCI Financial Services
