rule of 78 still legal?

Russ007

Hi,
My wife took out a car loan for £6314 over 60 months in october 2006. Total repayment of loan and interest would be £10,188.40 over 5 years.

When we called the credit company to find out how much it will cost to repay the balance we were told £4,957.

We were supprised that more of the repayment part of the loan had not been cleared so I started doing some reading about the rule of 78.

It appears to me that the rule of 78 is the method the bank have used to calculate the interest/repayment proportion to date. Given that the loan was taken out after the Consumer Credit Regulations 2004 (Early Settlement) does anyone know if this is legal or wether I have good grounds to complain?

Russ

di3004

Russ007 wrote: »

Hi,
My wife took out a car loan for £6314 over 60 months in october 2006. Total repayment of loan and interest would be £10,188.40 over 5 years.

When we called the credit company to find out how much it will cost to repay the balance we were told £4,957.

We were supprised that more of the repayment part of the loan had not been cleared so I started doing some reading about the rule of 78.

It appears to me that the rule of 78 is the method the bank have used to calculate the interest/repayment proportion to date. Given that the loan was taken out after the Consumer Credit Regulations 2004 (Early Settlement) does anyone know if this is legal or wether I have good grounds to complain?

Russ

Hi there Russ.

I am sure this rule has not been used since 2005, so if I were you I would contact the company and request for a breakdown in the calculations in the post, this way if you wanted to, you can add the breakdown on here and someone should come along and double check this out for you.
Then you will know if you have grounds for complaint.

Good luck !

Di.

tictax

Rule of 78 is no more. An actuarial calculation is made to work out the settlement figure. The interest is probably all front loaded so this is why the settlement is the amount it is.

I would find it very very hard to believe that a company would not have changed their settlement calculations for the new regulations.

CLAPTON

Does the paper work not tell you the settlement figures for 1/4, 1/2 and 3/4 of the time ?

I'm afraid that your settlement figure merely reflects that fact you took out a very high APR loan over relatively a long period

Simply put, at the early stages of a loan you owe a lot of capital so your monthly payment is a lot of interest and only a litttle capital.... as the time goes on more of the loan has been repaid and so the interest is less...

in fact exactly like a mortgage

whether you call it front loading depends upon your point of view...

marshallka

Russ007 wrote: »

Hi,
My wife took out a car loan for £6314 over 60 months in october 2006. Total repayment of loan and interest would be £10,188.40 over 5 years.

When we called the credit company to find out how much it will cost to repay the balance we were told £4,957.

We were supprised that more of the repayment part of the loan had not been cleared so I started doing some reading about the rule of 78.

It appears to me that the rule of 78 is the method the bank have used to calculate the interest/repayment proportion to date. Given that the loan was taken out after the Consumer Credit Regulations 2004 (Early Settlement) does anyone know if this is legal or wether I have good grounds to complain?

Russ

Rule 78 cannot be used on loans after may 2005.

quote

However, changes to the Consumer Credit Act mean that, on Tuesday, the Rule of 78 will be abolished on all new loans. Providers will now only be able to charge a maximum of two months' interest - as opposed to sums that have sometimes been much higher.
The reform will apply immediately for new borrowers. Existing ones who have loans for terms of 10 years or less, and want to settle early, will not benefit until 2007. Those with loans for longer than 10 years will not be covered until 2010.

Did you have PPI on this loan by any chance. It could be that you had a front loaded single premium policy attached to it.???

This may explain it.

Russ007

Thanks everyone for your helpful responses, I'll ask for a breakdown.

Pound-Of-Flesh

There seems to be a widespread misunderstanding about the Rule Of 78.

It is an out-of-date way to calculate how interest is naturally distrubuted across the lifetime of a loan. It is actually pretty close to the calculation used nowadays. It is NOT some great big nasty rip-off. Just a slightly less accurate calculation.

tictax is wrong to mention front-loading of the interest. Interest is always naturally front-loaded to some extent, as explained by Clapton.
The kind of front-loading I think tictax means is where you have to pay ALL the interest before you pay off ANY of the principal. This kind of loan no longer exists.