Advice on Rule of 78

dgncl · 15 April 2007 at 8:51AM

Morning peeps!

Something that has been bugging me for a while now is the letter that I had sent from Natwest regarding my unsecured personal loan.

When I cancelled my PPI (£78 per £300??!) it was outside of the 28 days, so I was lucky after being too lazy to cancel properly but I'm going to be paying interest on the PPI that I haven't actually borrowed, as far as I can see, as the interest is calculated from the start.

I had a discussion with a lass at Natwest on why, although my credit agreement detailed the loan being £297.25 per month including interest, after cancelling the PPI the repayments were going to be £303.26 instead. She wasn't particularly eloquent in her answer, and sounded a little frustrated as if she wasn't fully knowledgeable about why this would occur (a kind of 'it just is!' answer).

Anyway, she said she would arrange a letter be sent describing the calculation, which I received later. It said that the loan is calculated on the Rule of 78, therefore I am paying more of the interest off at the start of the loan then I get around to paying off the actual loan mostly further down the line.

Now this won't affect me greatly as I cannot afford to pay back the (originally) £20,000 loan earlier, at least not right now, but the loan was agreed in Nov/Dec 2005.

I have seen references on the internet suggesting that Rule of 78 was abolished from May 2005? The Consumer Credit Early Settlement Regulations 2005 seem to suggest so (http://www.opsi.gov.uk/si/si2004/uksi_20041482_en.pdf).

So are Natwest breaking the rules for some people in my position? Is there anyone here who can confirm the above new regulations?

Thanks! :beer:

DG

MarkyMarkD · 15 April 2007 at 9:11AM

I don't understand why cancelling your PPI would increase your TOTAL monthly payments. Do you mean that the monthly payment was £297.25 for the loan PLUS something for the PPI, and now it's £303.26 for the loan without the PPI?

'Cos if that's the case, it sounds incredibly like you've not been rebated the full amount on your PPI cancellation. Which wouldn't be surprising.

dgncl · 15 April 2007 at 9:28AM

Thanks MarkyMarkD,

Yes it would suggest that something is on top of the loan amount. The original agreement broke down the charges so that there were 84 monthly repayments of £297.25 plus 84 of £79.14 for the PPI, which technically is loaned to me, so they can get their grubby hands on more interest.

So the total loan of 1 x £376.39 + (after PPI cancelling) 83 payments of £303.26 is £25,546.97. The original total cost incl. PPI was £31,616.76 'including £6647.76 for Insurance Loan'.

The total cost now £25,546.97 - original loan+interest £25,324.00 = £222.97, so the £79.14 PPI has cost me an extra £222.97! That's some interest hike on borrowing £79.14 for 84 months....

frugalpam · 15 April 2007 at 10:21AM

dgncl wrote: »

Morning peeps!

Something that has been bugging me for a while now is the letter that I had sent from Natwest regarding my unsecured personal loan.

When I cancelled my PPI (£78 per £300??!) it was outside of the 28 days, so I was lucky after being too lazy to cancel properly but I'm going to be paying interest on the PPI that I haven't actually borrowed, as far as I can see, as the interest is calculated from the start.

I had a discussion with a lass at Natwest on why, although my credit agreement detailed the loan being £297.25 per month including interest, after cancelling the PPI the repayments were going to be £303.26 instead. She wasn't particularly eloquent in her answer, and sounded a little frustrated as if she wasn't fully knowledgeable about why this would occur (a kind of 'it just is!' answer).

Anyway, she said she would arrange a letter be sent describing the calculation, which I received later. It said that the loan is calculated on the Rule of 78, therefore I am paying more of the interest off at the start of the loan then I get around to paying off the actual loan mostly further down the line.

Now this won't affect me greatly as I cannot afford to pay back the (originally) £20,000 loan earlier, at least not right now, but the loan was agreed in Nov/Dec 2005.

I have seen references on the internet suggesting that Rule of 78 was abolished from May 2005? The Consumer Credit Early Settlement Regulations 2005 seem to suggest so (http://www.opsi.gov.uk/si/si2004/uksi_20041482_en.pdf).

So are Natwest breaking the rules for some people in my position? Is there anyone here who can confirm the above new regulations?

Thanks! :beer:

DG

This is info I found on http://www.financesurgery.co.uk/loan/rule78.cfm

Rule 78 abolished - Loans taken out from 31st May 2005
Rule 78 has now been abolished for all loans taken out from 31st of May 2005. Changes to the Consumer Credit Act have been made to ensure consumers get a fairer deal and have the following implications on the early repayment of loans taken out from 31st of May 2005:

The lender cannot charge more than 28 days penalty interest on a loan that is being repaid early
Lenders must now calculate the actual amount of saving a customer makes by repaying early this is called the rebate.
When customers take out the loan they must be shown the amount payable at quarter, half and three quarters of the way through the loan. This can be the exact figure or representative based on how much per £100 / £1000. These early repayment amounts must state that they are illustrative only and don't account for any variations.
Requests for early settlement quotes must now be actioned within 7 days
If extra insurances such as PPI or GAP have been sold as part of the loan, then they must also be factored into any early repayment quote. If they are sold as separate contracts then they must be calculated separately.

I'm in the same situation with a company called Citifinancial - I have asked how they have arrived at their early settlement figure (they're clearly applying the rule of 78) but they're not admitting to it. I'm taking it up with the Finance and Leasing Association for investigation, and possibly a solicitor also.

Pam

dgncl · 15 April 2007 at 8:40PM

Thanks Pam, that's a great link! I was lucky to get a letter from them stating the calculation in black and white.

From what I can read of the regulations change, they can use any calculation they like as long as it is as fair as the one detailed in the regulations themselves (which is better than rule of 78).

You could complain to the Financial Ombudsman http://www.financial-ombudsman.org.uk/. Sounds like the banks are yet again flouting legislation where they can get away with it.

CLAPTON · 15 April 2007 at 9:15PM

you need to check whether your loan is regulated under the CCA . The CCA only regulates loans under 25,000

MarkyMarkD · 15 April 2007 at 9:34PM

This is nothing to do with rule of 78. It's simply that the one month of PPI cost you three times as much as a normal month of PPI because the risk decreases over time and/or because they've penalised you for cancelling it early.

Getting penalised £150 isn't a big deal IMHO - many (dodgier) lenders would charge you an awful lot more for cancelling PPI at this stage.

jamesd · 15 April 2007 at 10:45PM

dgncl, they can't use the rule of 78 when calculating the rebate for early repayment so when or if you're able to repay early that'll be someting to chase. Not worth doing it now since it won't affect your current payments while you still have the loan.

frugalpam, they can charge an extra month if the loan was for more than a year. The initial 28 days period is so you have time to make the payment between getting the payment amount quote and the end of the period. You can eliminate this 28 days by paying off too much initially without even asking for the settlement figure; in this case you will get a rebate as of the day you repaid.

dgncl · 16 April 2007 at 9:14AM

Cheers jamesd, I'm looking to get a bigger salary and start lumping it into savings, so I can pay it off earlier (wouldn't make sense to change my loan as the interest rates have gone up).

When this occurs I don't know, but hopefully within the next year or two.

Advice on Rule of 78

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