front loaded loans

vik1

Can anyone give me some advise ?

I held an Alliance & Leicester loan over 5 yrs, after 18 mths I wanted to pay it off, however the outstanding amount is almost as much as I borrowed even though I have been paying it for 1 1/2 years.
After asking why, I was told '' Oh yes this is a front loaded loan so you repay the interest first''. I was shocked and asked if this would have been explained to me when I applied for the loan, they said ''NO'' but it would have been in your credit agreement.
I have received a copy of my credit agreement and it is in there but not explained clearly. Do I have a leg to stand on in getting a rebate as I feel I have just been totally ripped off !!!
:mad:

speedbird1973

With the exception of the automotive industry (which is also changing!) finance is usually front loaded like that.

I'd suggest as you've found it in the T&C you have no leg to stand on..

CLAPTON

vik1 wrote: »

Can anyone give me some advise ?

I held an Alliance & Leicester loan over 5 yrs, after 18 mths I wanted to pay it off, however the outstanding amount is almost as much as I borrowed even though I have been paying it for 1 1/2 years.
After asking why, I was told '' Oh yes this is a front loaded loan so you repay the interest first''. I was shocked and asked if this would have been explained to me when I applied for the loan, they said ''NO'' but it would have been in your credit agreement.
I have received a copy of my credit agreement and it is in there but not explained clearly. Do I have a leg to stand on in getting a rebate as I feel I have just been totally ripped off !!!
:mad:

It isn't fronted loaded...

its simply that you pay interest based on how much you owe, so in the early months of a loan you owe a lot so you pay a lot in interest; as time goes on the amount you owe drops so the interest drops

just like a mortgage

if you post up the full details then I'll check the settlement figure of reasonableness

Ilian2008

Its always a shocker but its completely usual. I had a secured loan. Paid 14k off it in 3 years. Had to pay back more than I had borrowed when I redeemed. That hurt like hell

beccad

It's pretty normal to do this - the company gets the full amount whether or not you pay it off early or not, assuming you don't pay it off within a few months. We got caught out like this when we took out our Northern Rock loan a couple of years back, seduced by the no early repayment penalty. At the end of the day, we're paying loads less now, even with the interest, than we would have done if we'd left all that money on the credit cards...

vik1

Oh well, jut thought that interest was added to the monthly payments not all at once like a mortgage.
Thanks everyone, I guess you live & learn.

ANY_CHANCE

Vik1, I have had these types of loans before and in my experience they dont explain them to you in full at the point of sale, only when it comes getting a settlement figure the penny drops.
In my opinion it isnt transparant and should not be allowed. The terminology used in the credit agreements is not clear and they should not expect lay people (people who do not work in the industry) to understand their waffle.

vik1

Thanks to ANY CHANCE, makes me feel a little less 'DAFT'.
I also feel that this should be explained at point of sale as if I had heard ''Yes you pay the interest first'' I would certainly not have accepted the loan offer.

CLAPTON

Lets be absolutely CLEAR here.

For any unsecured loan under 25,000 taken out from May 2005, the rules for early settlement are determined by REGULATION and LAW.

The interest is NOT all added at the beginning although the CCA dicates that the total cost of credit must be shown.

The settlement figure is the capital remaining plus a months interest .. this is normally presented as the total cost of credit minus a refund but it works as I've said above.

Obviously if you have taken out PPI then that will affect the overall cost. Many secured loans add certain fees etc that can make early settlement somewhat more expensive.

vik1

Hello again,
I had a £ 5000 loan taken out 02/02/2008 for 60 months.
The total amount repayable was said to be £ 6708, which I understood to be if the loan went full term.
I repaid the amount of £ 4021.64 on 01/06/09, after paying £ 111.81 per month meaning that after paying £ 1677.15 in total I assumed that I would only have circa £ 3322 plus any early repayment fee to pay.
So, if I am understanding this correctly I should have only had to pay the capital plus 1 months interest as my loan was taken out after May 2005 my capital remaining.
Please correct me if I am misunderstanding your answer.
'I did not have PPI.'
Thanks for your help Clapton.
:eek:

CLAPTON

I assume the interest rate was about 13% APR
it works this way

start with a loan of 5,000 paying 112 per month approx
at the end of the first month the interest charged is 5000 x 13% /12 approx or about £51 so you repay £61 capital

so in the second month you owe 4939 and so you pay 4939x13% /12 in interest i.e. 50.50 approx etc

by the sixth month your capital owed has fallen to 4,690 so you will be charged 4690x13%/12 = £48 interest etc.


so yes the interest is higher in the early stages of the loan simply because you owe more... very fair and reasonable even if most people don't understand how it works .. as I say just the same way a mortgage is calculated (excluding fees etc)


so if you work it all out then after 15 payments you would owe about 4,020
which is about right
you could try googling 'loan amortisation' and find a calculator to show the month by month figures.

your loan paper work should have shown the settlement figure after 1/4, 1/2 and 3/4 of the loan period