Front Loaded Loans?

frankie4fingers

Hello,

6 years ago, i took out a loan with Northern Rock, 8.8% APR over 10 years. Then, 2 years ago, i paid off aprpoximately half of the original amount of the loan with the proceeds of a house sale.

Today, i called to enquire as to how much was left to be paid, and the figure given was shockingly high. I was told that the loan was "front loaded", and therefore the lump sum i paid off didnt actually save me any money on the interest payable, but just brought forward my end date.

My question is, is this actually legal, as the repayments were based on me paying the monthly instalments, and therefore by me paying a lump sum, the interest rate would effectively increase a lot? I wasn't informed that it wouldn't effect the interest payable when i paid off this lump sum, and so i could have invested the money elsewhere to gain interest to pay off more of the loan. Are they not effectively charging me interest on capital that they have no longer lent to me?

Unforetunatly, i lost the T&Cs of the loan in a house move, and so cannot refer to them in the first instance. Should NR be able to provide me with the T&Cs of my loan as they were back in 2003 does anyone know?

Any advice would be gratefully received. I did call the financial ombudsman, but they informed me that they only dealt with complaints, and not offer legal advice.

Many thanks for your time

Rafter

Ask them for a copy of the T&C's - it seems very unlikely that they can effectively charge you interest on money you haven't borrowed. On a long term loan though - much of what you pay in the early years is just interest. About half way through the loan, that switches so you end up paying more off the loan and less interest. That is totally fair and reasonable because over time you are borrowing less and less.

The ombudsman cannot help you until you have exhausted all enquiries with Northern Rock and are unhappy with their response. However, they would have had to act against the T&C's or have T&C's that the ombudsman feels are unreasonable for them to rule in your favour.

Good luck

R.

frankie4fingers

Hi, thanks for your response.

I think i will give them a bell and see if they can send through a copy of my T&Cs, as it would be interesting to see.

I did clarify with the lady at the call centre that my lump sum didnt mean i would be reducing my interest liabilities, and it's that that's kind of got my goat really! :mad:

Thanks again for your time to respond. :T

CLAPTON

Without seeing the full figures its diffiucult to know.
I wouldn't assume the call centre people would know really either.
However, it is legal to have T&Cs that either won't allow overpayments at all or if they do allow the payment is doesn't reduce the capital for interest charging purposes but simply means the end date is brought forward.

Rafter

Clapton is probably right - he usually is!

Because this is not a regulated loan (such loans had a maximum term of 7 years) Northern Rock could have put a nasty up front interest charge on it.

As a result you effectively have had sum on deposit with Northern rock earning 0% interest for the last 2 years and until your loan is paid off.

You would be better off asking for your overpayment back and putting it in an ISA!

R.