Advice regarding my loan- ref early repayment

NoreenOMS

Hi all, hoping you may offer some info/advice, as I have been trying to work out the cost we will pay in total if we repay our loan early.

We have a 24k loan, with 45 months left to run (was taken out at 48 months). The apr is 11.1%, with repayments at £615.31 per month.(total interest - £5534.88)

If for 12 months from month 41-31 (Feb 09-Feb 10) we paid off an additional £600 per month, what would our total amount left to repay?

There is some information, as follows on our loan document:

1/4 term of loan has passed- repay £19845.19 in single sum
1/2 term of the loan has passed- repay £13482.58 in single sum
3/4 of the term has passed - repay £7098.12.

If my sums are right, based on the info above, if we pay it off with 3/4 of the term passed (i.e one year early),we would only pay a couple of hundred pound less interest then if we let it run for the whole 4 years. Is that right?

I know I have probably made all of the above more complicated then it is..!

Any advice anyone could offer would be great, failing that I guess I will just have to pop into the bank...

bigstoo

It all depends, really, on whether your loan agreement allows you to make overpayments. Also, if it does, what the penalties are.

If it's a regular personal loan then there will probably be an early repayment charge, which is likely to be something like an additional month's interest added.

If my sums are right, based on the info above, if we pay it off with 3/4 of the term passed (i.e one year early),we would only pay a couple of hundred pound less interest then if we let it run for the whole 4 years. Is that right?

Yes, because the amount left on the loan is a lot less in the final year, therefore the amount of interest you are paying is a lot less.

Take this (ficticious) example:
You take a loan of £1000 over 10 months. The APR is 12% (which is a useful 1% per month).
According to my calculations, your monthly payment would £105.58 a month.
In the first month, your loan would have accrued £10 (1% of £1000) interest, so of the £105.58 your are paying only £95.58 is paid off the loan.
Next month, your loan is £95.58 smaller so it is only accruing £9.04 interest. This means more of your payment is paying of the loan.

And so it goes on, snowballing, until the last month where you are only paying £1.05 in interest. Basically, making overpayments early on a loan has a much more drastic effect than later.

CLAPTON

If you did, in fact pay an additional monthly payment from feb 09 for 12 month of 600 and the loan company allows overpayments that directly reduce the capital, the loan would then be finished in approx 32 or 33 months i.e. Feb / March 2011

NoreenOMS

Hi both, thanks for the info, I must admit I find it all very confusing, but your advice has helped. Clapton- you seem to be coming to my rescue these past couple of days !

Just one more thing- what would you suggest doing is the best option- is my plan detailed above worth it, or would you suggest another option?

CLAPTON

if your loan allows overpayments and the overpayments reduce the total interest paid (some loans do and some don't) then making overpayments as early as possible and as large as possible will reduce the total interest and bring forward the debt free date.... so yes