How to calculate if PCP early redemption payment is correct?

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pauric

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I took out a car loan and I am paying it off very early (after 4 months) but I'm shocked about how much the interest is front loaded on this. When asking the lender about it they have said it is because interest is being calculated by the rule of 78.

I took out a 4 year PCP loan at 4.9%, the total of the loan was €79,390.63 and the GMFV after 4 years was €31,014.84.

I've paid 4 months at €1244.10 each month so a total of €4976.40.

Now if I pay the loan off this month I will owe €76,947.68, so I've managed to pay €2442.95 of the loan and paid €2533.45 in interest.

Using this calculator here it is calculating that I would owe €75,710.82, which is a difference of €1236.86.

When asking BMW about this, they are saying that there are calculating the interest payments using the rule of 78 which seems to penalise early repayment compared to how it is calculated above.

Looking through the contract it doesn't mention how interest is calculated, and no mention of how early repayments are calculated. How does one get some transparency here?
 
PCP is legally a hire purchase agreement, so it's a rental agreement rather than a loan. What you've been told is standard in these contracts - it hasn't really been an issue for years due to zero rate PCPs. There's no point looking at PCP calculators outside Ireland as they might be regulated different.

Not sure how useful this one is: https://www.drcalculator.com/calc/rule78.html
 
So you are saying what they are doing is probably correct? How can one validate though that they are calculating redemptions correctly unless there is some transparency?
 
pauric said:
So you are saying what they are doing is probably correct? How can one validate though that they are calculating redemptions correctly unless there is some transparency?
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Yes, unfortunately they fall outside a lot of regulations. Its a long time since I worked in the area. it's possible that the Central Bank has to approve the calculation used, but I would need to refresh my memory.

Rule of 78 is widely used, and is also called 'sum of digits' (78 being sum of all numbers from 1 through 12, bring the months in a year).

48 months sum of digits is 1176.

So your total interest for 4 years is treated as 48/1176 in first month, 47/1176 in 2nd month, and so on. The effect 'front loads' the interest charge as you've learned.
 
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