Un secured loans, crafty interest loading, ANYONE KNOW?

RUFFYONEVILLA

Hello,
Reading the article on finding the best loan, I read about the RULE OF 78, which has apparently been banned as it is unfair.
However...
How is it that when I asked the settlement dept at Alliance and Leiceste how they calculate the early settlement figure they told me:

The interest on the whole loan is not split equally between all the repayments. 50% (YES 50%) of the total interest is charged in year 1, the 40% year 2, the rest after.

So even though they have a a months worth of interest stated as their redemption fee, in fact that is not the only penalty that you'll face if you want to pay off the loan early, as you will have been paying a disproportionate amount of interest already.

So my question is this.
Are there any banks/bs that work work out the interest by dividing the total amount of interest by the total months of the loan? Rather than stitching us up?

I understand that they have to have and early repayment charge but this seems unfair.

Example, £5000 over 48 months, repayments £123, total repayable £5904.
With this 50% thing you are paying £37.66 a month interest for the first 12 months, so if you want to pay early they already have already made some money out of you.

£904/48= £18.83, so it should only be £18.83 a month interest.

CLAPTON

No, no-one does that as it's completely illogical and against CCA rules.
Although the regulations are a bit complicate the basic method is as follows

let's say you borrow 5000 at about 8% over 48 month paying 122 per month

then in the first month you owe the full 5,000 so your interest would
5000 x 8% /12 = £33.33 so you will pay off 122-33 = 89 in capital

so in the second month you owe 5000-89 = 4,911 so the interest is
4,911 x 8%/12 = 32.70

so in the third month you owe 4,822 and so the interest will be
4,822 x 8%/12 = £32.12
.....
after 1 year you will owe 3,875 so the interest charged will be
385 x 8% /12 = 27

in the last month you will owe only 121 and the interest will only be £1.

Thats how it works... you pay more interest in the early months because you owe more and less interest in the latter months because you owe less.

Just in fact the way mortgages work.

Just suppose you had 5000 in savings .. would be expect to earn more interest on that than if you only had 121 in savings?

RUFFYONEVILLA

Hmmmm
Thanks for the reply.
How is it then that they cannot answer the question:
How much will my redemption figure be if I want to pay the loan off after 12 months?

CLAPTON

Loan agreements must by law show settlement after 1/4, 1/2, 3/4 of the loan term.

I would imagine that they can't say how it works because it is a little difficult to understand and they aren't loan specialist just call centre workers or salespeople.

the settlement figure in the case above would be about 3,900 - 4,000

Robert_Sterling_3

The original post here has been removed as the spreadsheet I imported into the post
did not come out right