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  • FIRST POST
    Ibbydolla
    Rule of 78 or front loaded interest please help!!
    • #1
    • 26th Mar 08, 4:03 PM
    Rule of 78 or front loaded interest please help!! 26th Mar 08 at 4:03 PM
    I would appreciate some advice regarding this Rule of 78 / front loaded interest issue. I took out a personal unsecured loan with HFC bank for 7500.00 over a period of 60 months in November 2004. I made 31 monthly payments of 212.00 however then fell into arrears. I was issued a settlement figure of 5555.58 in January 2008 but this has now grown to 7115.38!!!
    Anytime I try to speak to anyone at HFC regarding Rule of 78 (front loaded interest) and the fact that it was abolished for loans taken out at the time of this one in May 2007 they keep saying that they aren't aware of any Rule of 78 and that it simply front loaded interest and that my original amount borrowed is 12,500!!!!!
    I really want to try to settle this loan but don't want to pay extortionate amounts of money to do so. Can anyone advise if this is correct??
    All help greatly appreciated
Page 1
  • marshallka
    • #2
    • 2nd Jun 08, 7:22 PM
    • #2
    • 2nd Jun 08, 7:22 PM
    I would appreciate some advice regarding this Rule of 78 / front loaded interest issue. I took out a personal unsecured loan with HFC bank for 7500.00 over a period of 60 months in November 2004. I made 31 monthly payments of 212.00 however then fell into arrears. I was issued a settlement figure of 5555.58 in January 2008 but this has now grown to 7115.38!!!
    Anytime I try to speak to anyone at HFC regarding Rule of 78 (front loaded interest) and the fact that it was abolished for loans taken out at the time of this one in May 2007 they keep saying that they aren't aware of any Rule of 78 and that it simply front loaded interest and that my original amount borrowed is 12,500!!!!!
    I really want to try to settle this loan but don't want to pay extortionate amounts of money to do so. Can anyone advise if this is correct??
    All help greatly appreciated
    Originally posted by Ibbydolla
    I would write to them and ask them to reduce your settlement and if they can not then say you will go to the financial ombudsman about it. They need to send you out a final response to your complaint (and the words have to be a final response) , Then you can ask the FOS or Office of fair trading to intervene. Good luck
  • Dave the Ginger Cat
    • #3
    • 2nd Jun 08, 11:38 PM
    • #3
    • 2nd Jun 08, 11:38 PM
    Their January settlement figure looks in the right region to me and I wonder if you are being given a mix of settlement figures and balances here. The original balance quoted of 12,500 is 12 x 212 (Actually 12,720), and when I worked for them, their systems would show the 12,720 as well as the 7,500 which can be confusing.

    Rather than approach FOS at this stage, I'd be inclined to ask HFC to explain the two figures and the differences between them.

    One possibility - if your account has been defaulted between Jan 2008 and now, then that means they will terminate the agreement and ask for the full balance. If you've accumulated some arrears, this is very probable, and explains why the settlement figure might be higher today than earlier in the year.

    I'd steer away from questions about the Rule of 78 - they can still issue front loaded interest based loans - the difference is in the maths behind how the rebate is calculated. I think therefore the question iright now is why are the figures so different, rather than how they worked it out.

    If once you are aware of this, you remain unhappy with the settlement figure, you can ask them to justify the calculations, especially the rebate. Back in my HFC days, I used to do this, and was able to show them to within a few pence.

    I'm sure once you understand why the amounts differ, your options will be clearer.

    Good luck
    So many glitches, so little time...
  • Pound-Of-Flesh
    • #4
    • 19th Aug 08, 9:30 PM
    • #4
    • 19th Aug 08, 9:30 PM
    The Rule of 78 is NOT the same thing as front-loaded interest.

    When you take out any normal loan, you pay the same repayments each month. At the beginning you still owe a lot - so the interest is a lot. Therefore at the beginning the lion's share of the repayment each month is swallowed up by the interest.

    But a little bit goes towards paying off some of the principal. So next time the interest is calculated, the amount you owe (the principal) is slightly less. So the interest is slightly less. So slightly more of your repayment goes to pay off a bit more of the principal. This is like a snowball effect. So as time goes on, each repayment is paying less and less interest and more and more principal.

    BUT THAT IS NOT FRONT-LOADED INTEREST.
    That is the normal way loans work. But some people mistakenly and misleadingly call it front-loaded.

    If you draw this as a graph, it makes a curve.
    The Rule of 78 is an old way of calculating early settlement figures. It approximates to the actual curve but is not quite the same because it is an over-simplified calculation (you can look it up if you want - I won't desribe the details here). It does very very slightly increase the front-loading of the curve - but hardly enough to notice.

    So RULE OF 78 IS ALSO NOT ABOUT FRONT-LOADING INTEREST

    Ok - so what is front-loaded interest? It is when the lender calculates all the interest for the full term of the loan, adds it on at the beginning AND YOU ARE OBLIGED TO PAY IT ALL EVEN IF YOU PAY OFF THE LOAN EARLY.

    Let's say you borrow 10,000 in for 5 years and the interest is calculated to be 5000 altogether. So your 'balance' starts at 15,000. Now suppose that a couple of months later you come into some money and want to pay off the loan. You could still owe over 14,000 - IF it is front-loaded.

    But that is a very big "IF". Lots of loans have the interest CALCULATED up-front. This tells you the total cost of the borrowing. But that does NOT necessarily mean you have to pay all that interest if you settle up early.

    I am not even sure if up-front loading (as I have described it) is even legal. But I am pretty sure it is very rare. But I am also pretty sure that lenders try to MISLEAD us to think we have up-front loaded interest so they can deter us from paying the loan off early.

    If your loan simply had an up-front calculation of the interest, then at any given time there are 2 different figures that are relevant-
    - the 'balance' is how much you still owe ASSUMING you let the loan run its full term. This is the figure they might quote you to put you off redeeming the loan early.
    - there is also a 'settlement figure' which is the amount you would pay to redeem the loan. They MUST provide this if you ask for it (in writing I think). This is a re-calculation that takes into account all the interest you won't need to pay after you pay the debt off early.

    If those two figures are the same, you really do have front-loaded interest. But my guess is that most of us who think we do actually do not.

    This is something I am currently looking into because I believe that staff in banks actively mislead their customers in this way.
    I will post again when I have more details
  • martin_egerton
    • #5
    • 30th Oct 09, 11:31 AM
    • #5
    • 30th Oct 09, 11:31 AM
    With regard to the front-loading of loans, I don't think its legal to do it in the extreme.

    But on trying to settle my 24500 HSBC loan after 4 of 5 years I found that it had been to some degree. The difference between the balance and settlement was 69p.

    There are the bank's redemption penalties which are at most two months interest, but the HSBC rep essentially told me that I only had a couple of months interest to pay while still 12 months from the end.

    Basically, once they work out a fixed rate loan they are free to decide on the rate at which they consider interest paid to some degree and as such, in my case they can claim the entire profit from the loan despite early payment. According to the rep that is normal practice in the industry.

    The more I look into this stuff, the more I find it rigged. Credit is rigged heavily to exploit those with little money but less obviously to take advantage of those whose circumstances improve and wish to clear their debts sooner.

    Potentially, even loans which say 'no redemption penalty' may allocate the interest in this way and probably do.

    Needless to say, I am not bothering to clear the loan and will take the full five years credit while I earn interest on the money I would have used to pay it.
  • CLAPTON
    • #6
    • 30th Oct 09, 1:45 PM
    • #6
    • 30th Oct 09, 1:45 PM
    With regard to the front-loading of loans, I don't think its legal to do it in the extreme.

    But on trying to settle my 24500 HSBC loan after 4 of 5 years I found that it had been to some degree. The difference between the balance and settlement was 69p.

    There are the bank's redemption penalties which are at most two months interest, but the HSBC rep essentially told me that I only had a couple of months interest to pay while still 12 months from the end.

    Basically, once they work out a fixed rate loan they are free to decide on the rate at which they consider interest paid to some degree and as such, in my case they can claim the entire profit from the loan despite early payment. According to the rep that is normal practice in the industry.

    The more I look into this stuff, the more I find it rigged. Credit is rigged heavily to exploit those with little money but less obviously to take advantage of those whose circumstances improve and wish to clear their debts sooner.

    Potentially, even loans which say 'no redemption penalty' may allocate the interest in this way and probably do.

    Needless to say, I am not bothering to clear the loan and will take the full five years credit while I earn interest on the money I would have used to pay it.
    Originally posted by martin_egerton

    this is simply incorrect

    although of course the interest is higher in the early months as you owe more money to them than in the later months when you owe less.

    if you post the actual figures I will attempt to explain them to you

    loan amount
    APR
    period of loan
    settlement figure and how many payments had yu made whent the settlement figure was given
  • efnewman
    • #7
    • 5th Nov 09, 3:00 PM
    • #7
    • 5th Nov 09, 3:00 PM
    this is simply incorrect

    although of course the interest is higher in the early months as you owe more money to them than in the later months when you owe less.

    if you post the actual figures I will attempt to explain them to you

    loan amount
    APR
    period of loan
    settlement figure and how many payments had yu made whent the settlement figure was given
    Originally posted by CLAPTON


    Hi I was interested in your post. I wonder could you work this one out for me.

    10,000 loan over 60 months.
    Payments 193.75 Have made 39 payments
    Interest rate 5.8%

    Can you tell me roughly how much I owe to pay it off? I have been give a figure of 3,091.00, its actaully saves me just 167 over the full term.

    Totaly payable over the 5 years including interest : 11,625.00

    I wonder is this right? If so hardly seems worth paying it off.

    Thank you for your time.
  • CLAPTON
    • #8
    • 5th Nov 09, 4:24 PM
    • #8
    • 5th Nov 09, 4:24 PM
    Hi I was interested in your post. I wonder could you work this one out for me.

    10,000 loan over 60 months.
    Payments 193.75 Have made 39 payments
    Interest rate 5.8%

    Can you tell me roughly how much I owe to pay it off? I have been give a figure of 3,091.00, its actaully saves me just 167 over the full term.

    Totaly payable over the 5 years including interest : 11,625.00

    I wonder is this right? If so hardly seems worth paying it off.

    Thank you for your time.
    Originally posted by efnewman

    I can make no sense of your figures

    after 39 payments you still have 21 to make so if you run to term you will need to pay 4,068 (ie 21 x 193.75)

    so a settlement figure of 3,091 is very good... in fact far too good to be correct
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