Lies, Damn Lies and Flat Rate!

MacManus Asset Finance are dedicated to assisting businesses secure finance for their vehicles and machinery, and we are constantly looking at ways to help and add value.

This week we wanted to draw your attention to a situation that has surprised us, and it is with regards to Flat Rate finance quotations and how they are calculated.

We have recently secured finance for a haulage firm who was surprised that the flat rate we had quoted was higher than that quoted by the dealer, however our monthly payment was lower!

We were sent a copy of the quote that had been provided by the dealer and it soon became apparent what was happening. Now whether it was sharp practice or ignorance we don't know, however it has concerned us enough that we wanted to draw it to the attention of our customers, and potential customers, as you too could be being mislead about your cost of finance.

This information could save you a lot of money. The following example explains what was happening:

Vehicle Cost £30,000
Deposit £10,000
Amount of financed £20,000
36 payments of £622.22

Now the correct way to calculate a flat rate is to use this formula:

Number of payments multiplied by monthly payment
Minus Amount of Finance
Divided by Amount of Finance
Multiplied by 100
Divided by number of years of the loan

So in the above example we would have:
36 x 622.22 = 22,399.92
minus 20,000 = 2,399.92
divided by 20,000 = 0.12
multiplied by 100 = 12
Divided by 3 years = 4.0% Flat Rate

Thus the correct Flat Rate to use is 4.0%

However, what the dealer was doing was using the vehicle cost, not the amount of finance in the calculation. This is completely wrong as the interest only relates to the amount of finance, not the price of the vehicle.

By using their FALSE method, with higher monthly payments, they were calculating their flat rate using the following formula.

Number of payments multiplied by monthly payment plus Deposit
Minus Vehicle Cost
Divided by Vehicle Cost
Multiplied by 100
Divided by number of years of the loan
So using their FALSE method we have:
(36 x 630.56) + 10,000 = 32,700.16
minus 30,000 = 2,700.16
divided by 30,000 = 0.9
multiplied by 100 = 9
Divided by 3 years = 3.0% Flat Rate

So on face value, we were quoting 4% flat and the dealer was quoting 3% flat, however our payments were £300 cheaper over the 3 years. This is because the dealer was quoting using the FALSE method.

Using the correct method, that is using the amount of finance and not the vehicle cost their Flat Rate is actually 4.5%!

We would strongly urge you to print this email and keep a copy to hand next time you are getting a finance quotation to ensure that the flat rate you are being quoted is the correct one, and remember the most important number to look at is the monthly payment, as we all pay in pounds and pence and not in Flat Rate.

MacManus Asset Finance has, and will always, quote Flat Rates correctly and are happy to review any written quotations you may have been provided with to confirm whether the correct method has been used.

Finally, as ever, if you are in the market for vehicle finance now or in the next few months please get in touch.  

If you'd prefer you can call us on 0845 3300 455 or email  enquiries@macmanusassetfinance.co.uk