Early redemption of loans taken out before 31 May 2005

Zeusie · 20 March 2007 at 10:38AM

Am I right in saying that anyone currently considering the early redemption of an unsecured loan for an amount under £25,000 (and less than 10 years in term), which was taken out before 31 May 2005, would (generally) be better off waiting until after 31 May 2007 before redeeming their loan?

I refer of course to the terms of the Consumer Credit (Early Settlement) Regulations 2004, which is now in force for loans under £25,000 taken out after 31 May 2005, and did away with "rule 78, and will, I think, extend also to pre-regulation loans from the end of May 2007.

Zeusie · 21 March 2007 at 5:53AM

Anyone?

DawnW · 21 March 2007 at 8:49AM

This is my understanding Zeusie, as I have such a loan. It hasn't been worth settling it previously, as I would lose out by taking the money out of savings, in comparison with what I would save by paying it off. I am hoping someone more knowledgeable will come along in a minute and tell us if we are right!

jamesd · 21 March 2007 at 1:03PM

Ask the lender if they will redeem it under the new rules now. They might.

MSE_Martin · 21 March 2007 at 7:06PM

It's my belief too but I want to check it.

WH39 · 21 March 2007 at 11:10PM

Hi

I recently settled a loan with bank of scotland for 10k after 8month. It was taken out after May 2005 and paid £1660.00 in interest and costs. I questioned if they used rule 78 but was told they used a new formula + 2 month interest, still think I paid to much to settle the loan. Any help!!!!

frugalpam · 22 March 2007 at 12:19AM

WH39 wrote: »

Hi

I recently settled a loan with bank of scotland for 10k after 8month. It was taken out after May 2005 and paid £1660.00 in interest and costs. I questioned if they used rule 78 but was told they used a new formula + 2 month interest, still think I paid to much to settle the loan. Any help!!!!

Taken from 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.

Rule 78 - Loans taken out before 31st May 2005

For existing loans taken out before 31st May 2005 rule 78 may still apply, its a good idea to check with your lender to find out how your interest payments are calculated especially if you are considering early repayment of the loan.

I'd get back on to them and query those charges! I'm currently after Citifinancial (Part of Citibank group) who are clearly trying to apply the Rule of 78 judging by the settlement figure they quoted me. I've asked for exact details of how they've come to the figure they quoted. If they persist in trying to rip me off, the next letter they get will be from my solicitor.

Pam

jamesd · 22 March 2007 at 7:06AM

ukpam2000, they can't charge a penalty of 28 days interest. Rather, if you ask for a settlement figure, they are required to calculate it for the situation 28 days in the future to give you time to pay after you get the figure, or they can use a date after that if you specify a later one, per 5(a).

In addition, where the term is longer than a year, the creditor can increase the delay at their option by either one month or 30 days, per 6(a) and 6(b).

If you were to repay without even asking for a settlement figure, you'd get a rebate of any excess payment without any interest for those 28 days, per 5(c), though 6 still applies and can add either a month or 30 days. This offers the lender an option of efffectively charging a penalty of interest for one month or 30 days on a loan lasting longer than a year.

The pay without asking for a settlement, then collect a rebate of any excess, approach is the cheaper method if you have enough money to overpay and wait for the rebate.

Paragraph numbers are from the The Consumer Credit (Early Settlement) Regulations 2004. The worked examples there are helpful.

Zeusie · 25 March 2007 at 10:01PM

Just bumping this in the hope Martin has more info.

:money:

jamesd · 25 March 2007 at 10:56PM

Zeusie, quoting from the regulations:

"The [older] Regulations ... continue to apply... before the date on which these [new, better] Regulations come into force -

(a) until 31st May 2007, if the agreement is for a term of 10 years or less;

(b) until 31st May 2010, if the agreement is for a term of more than 10 years."

You can ask for a settlement amount effective 28 days plus some allowance for time in the mail (call it 32 days total) from when you read this if you want.

Or on 1 April you can pay the balance plus two extra monthly payments to allow for interest for one month and minor calculation differences. You should end up with a partial refund cheque after this because it's likely to be more than you really need to pay.

For loans covered by the new rules it's always cheaper to immediately pay this overpayment and then wait for them to return the excess, because this avoids the 28 days notice and extra interest period they are required to include in their calculation if you ask them for the settlement amount.

Zeusie · 26 March 2007 at 11:31AM

jamesd wrote: »

Zeusie, quoting from the regulations:

"The [older] Regulations ... continue to apply... before the date on which these [new, better] Regulations come into force -

(a) until 31st May 2007, if the agreement is for a term of 10 years or less;

(b) until 31st May 2010, if the agreement is for a term of more than 10 years."

You can ask for a settlement amount effective 28 days plus some allowance for time in the mail (call it 32 days total) from when you read this if you want.

Or on 1 April you can pay the balance plus two extra monthly payments to allow for interest for one month and minor calculation differences. You should end up with a partial refund cheque after this because it's likely to be more than you really need to pay.

For loans covered by the new rules it's always cheaper to immediately pay this overpayment and then wait for them to return the excess, because this avoids the 28 days notice and extra interest period they are required to include in their calculation if you ask them for the settlement amount.

Thanks.

Just one question:

How can i find out the balance with out asking for a redemption figure?

Early redemption of loans taken out before 31 May 2005

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