Is my loan legit???

mf0u1098

Hi Everyone,

I read Martin's advice on this website on the cost implications of paying off a loan early. It stated that the two things to watch out for are early repayment charges and the rule of 78. It said that the rule of 78 was the old style of calculating a loan and was abolished in June 2005. I don't want to disbelieve Martin but is this actually true???

I only ask as I have an 8yr loan and have been trying to figure out how much I will have to repay if I pay it off 2.5yrs early (I have already been paying for 2.5yrs). They gave me 3 figures on the credit agreement stating how much I would owe if I paid off a quarter, half or 3-quarters of the way through the term. I worked out the rule of 78 as per Martin's instructions in the website and worked it out to within £40 at each of these time frames so I know this is how they must have worked it out (give or take an admin charge).

The only problem is that my loan was taken out in Oct 2006 which is 1.5yrs after the rule of 78 loans were supposed to be abolished! How are companies now supposed to work out the repayments in terms of the % of capital/interest in each of the monthly payments? Was my bank wrong to calculate my loan this way???

I've worked out that if I was to pay off my loan 2.5yrs early then I would only be £400 better off due to the rule of 78 and the early repayment charge!!!!!!!!!!!!!! How is this fair when my loan was for £18350???????

Any advice will be greatly received!

mf0u1098

CLAPTON

why do you think rule 78 was unfair?
why do you think you are better off with the new rules?

however if you want sensible comments post up the full specific figures and maybe we can make a considered judgement

mf0u1098

what are the new rules?

CLAPTON

new rules are

http://www.opsi.gov.uk/SI/si2004/20041483.htm

however they are a little diffucult to understand but basically they are the same as how mortgages work plus up 2 months interest for early repayment.

~Brock~

Basically the old and complicated Rule of 78 method of calculation was replaced by the new and even more complicated Actuarial method of calculation, which in practice isn't that much different on most loans, as the OP appears to have found out. Apparently it's called progress

mf0u1098

Thank you both, the link was incredibly helpful!!!

Am I right in understanding then that even though these 2004 Regulations came into force on 31st May 2005, that they do not apply to any loans taken out before 31st May 2007? I am looking at section 10 where it refers to section 8 continuing to apply until 31st May 2007 for any loans less than 10 years...? Have I got this right?

Basically my loan was taken out in Oct 2006 so from this I would assume that it is still applicable to use the old style calculations for any rebate...?

Thanks!!!

CLAPTON

loans taken out after may 2005 follow the new rules

loans taken out before may 2005 and less than 10k had to change to the new rules by may 2007

mf0u1098

Oops sorry Clapton, you are absolutely right! Just re-read it now after eventually getting some sleep...!

Thanks again!!!

RobertoMoir

mf0u1098 wrote: »

I've worked out that if I was to pay off my loan 2.5yrs early then I would only be £400 better off due to the rule of 78 and the early repayment charge!!!!!!!!!!!!!! How is this fair when my loan was for £18350???????

At the risk of stating the obvious, people throw "fair" around in these kinds of posts a lot and it's worth remembering something: Businesses don't exist to provide us with what is "fair", they exist to provide their owners with as much profit as they can legally get away with. The question isn't "What's fair", it's "What does my contract say?" and "is the contract reasonable and enforceable?"