Interest rates question

Jacks_xxx

RAS wrote: »

Nice to see you around jacks

It's always nice to see honeybun. I think your posts on here are awesome! :A


Moneywaster, I don't have time to do the snowball for you right now but I will later on.

Take care,

Love Jacks xxx

SerenaGoode

In theory you're right. But the loan is a fixed repayment amount which you can't change without renegotiating the loan, whereas the overdraft is floating.

If there is any way of reducing the interest payable on the overdraft, then it would be nice. For instance if you could add it on to the loan at the same rate and then vow to stay in credit it would be a small improvement.

Maybe better to just try to edge the overdraft towards the black and keep paying the loan though.

SerenaGoode

MoneyWaster2007 wrote: »

RAS i have checked the snowball calculator, but i still dont understand...

it is saying the wrong amounts of interest charged per month for my loan, as it isnt taking into account that i have been overpaying on it. and the interest charged per month is worked out on the basis that i hadnt paid off any extra, so is higher than shown on the snowball calculator.

i still think i would save money by paying the loan off first, but everyone i ask tells me otherwise??

i must be thick, because its got me real confused...

Ah, sorry didn't read this one.

If you are overpaying on the loan then you should certainly be channeling that money into paying off the overdraft first.

The reason is simple to understand - imagine that right now you could pay off the overdraft or £700 of the loan. Paying off the overdraft would save you more money (about £5 more a month) because you are paying a higher rate of interest on that £700 than on a £700 portion of the loan.

The snowball calculator just takes this fact and shows how it is also a cumulative effect.

MoneyWaster2007

i see your point, but what i am saying is that because i have been overpaying on the loan, the loan will never get to the point where it would have been £700 according to the original agreement (month X of the loan term). so therefore there will never be a point in time where you could directly compare the £700 at different interest rates and look at it and say well yes you would be better to pay the higher APR one first. In other words when my loan gets to £700 which will be well ahead of the original agreement, my monthly interest charge at that point will be much greater than it should be. So in a round about way, because i have been overpaying on the loan i feel it would be best to continue to do so. however, had i not overpaid anything on the loan, then it would have been better to pay the overdraft first. (deep breath).

because having spoken to the bank, they told me that the monthly interest i get charged on the loan is based on what the outstanding balance would have been at the time according to the original agreement (had i not overpaid).

its hard to explain,

i still think i am wrong though, because why would everyone tell me i'm wrong if i'm right.....grrrrr, i just cant get my head around it...

SerenaGoode

MoneyWaster2007 wrote: »

i see your point, but what i am saying is that because i have been overpaying on the loan, the loan will never get to the point where it would have been £700 according to the original agreement (month X of the loan term). so therefore there will never be a point in time where you could directly compare the £700 at different interest rates and look at it and say well yes you would be better to pay the higher APR one first. In other words when my loan gets to £700 which will be well ahead of the original agreement, my monthly interest charge at that point will be much greater than it should be. So in a round about way, because i have been overpaying on the loan i feel it would be best to continue to do so. however, had i not overpaid anything on the loan, then it would have been better to pay the overdraft first. (deep breath).

because having spoken to the bank, they told me that the monthly interest i get charged on the loan is based on what the outstanding balance would have been at the time according to the original agreement (had i not overpaid).

its hard to explain,

i still think i am wrong though, because why would everyone tell me i'm wrong if i'm right.....grrrrr, i just cant get my head around it...

You're not comparing the loan at the point where it is £700 left to pay. You're comparing clearing the next £700 worth of the loan (eg reducing it to £3053) as opposed to clearing the £700 overdraft.

But basically, it is even simpler. If you have a choice, then it is always most effective to clear the higher interest rate first. It doesn't matter what the total amount on each is, only what the interest rate is.

Let me make it even simpler. Say you have £100 and can pay it against the loan or against the overdraft. At the end of the month, paying £100 off the loan will save you £11.50 (divided by 12 to get one month's interest). Paying it off the overdraft will save you £19.50 (divided by 12). Clearly paying it off the overdraft saves you more money.

The same applies any time you have a choice between which one to pay money off, no matter how much or little it is. Every £1 spent paying off the overdraft is more effective than £1 laying off the loan.

The true effectis much higher, because in the long run the interest is compounded. So if you leave money on the overdraft it costs you 8% (pa) more a month than the same money would have on the loan. Then next month you pay another 8% extra on that 8% and so on - over a year this can add up to quite a big difference.

SerenaGoode

MoneyWaster2007 wrote: »

because having spoken to the bank, they told me that the monthly interest i get charged on the loan is based on what the outstanding balance would have been at the time according to the original agreement (had i not overpaid).

Also if this is correct the difference is even more stark. Because overpaying on the loan doesn't save you any money at all - they charge you the interest you'd have paid in any case. All you do is reduce the outstanding debt. Whereas paying off the overdraft does save you interest. So the difference is 19.5% rather than the 8% (19.5 - 11.5) I used in my last post.

(I think in practise the bank says this because the repayment schedule on a loan is set up at the start, with interest frontloaded - in fact you are effectively reducing the interest but this would only show in a settlement figure.)