Loan types - would you agree?

sproggi

I have just had a conversation with OH's bank and they are offering him the chance to transfer his flexable loan (don't know apr but it's high, £4950 balance, interest £107, min payment £149) to a fixed term loan with the option to over pay each month, penalty free but he would need to pay £950 off first as max is £4000.
Now when I asked her what the apr would be, she became rather defensive saying that 'it is not the apr that is important, but the fact that you could over pay and therefore pay over a shorter time, in turn, reducing the amount of interest paid'. When I pointed out that my bank was offering 6.9% fixed rate, she finally conceeded that the fixed term loan she was offering was at a 'higher.....quite a bit higher!' rate, but again countered with 'that (6.9%) rate would only be offered in special circumstanses' and that the amount of interest paid on theirs would be lower.

Would you agree with her that 'high apr with option to over pay' works out cheaper than 'low apr with fixed payments'?

Sproggi

Astaroth

Depends on your ability to over pay and the differences in APR

grumbler

sproggi wrote:

Would you agree with her that 'high apr with option to over pay' works out cheaper than 'low apr with fixed payments'?

Generally speaking, not. Try to play with Loan calculator and amortization and compare Total Interest paid.

Another more simple calculator: http://www.whatsthecost.com/loan.aspx

Pythagorous

paying off a loan early can make a big difference as you will see from using the loan calulator.

Also if your financial future is in any uncertainty not being able to overpay could be a serious burden.

I'd advise Thinking carefully before committing to a loan you can't overpay.

sproggi

Thank you for your replies,

I guess I was a bit annoyed because of her attitude and comments like 'I've been here 3 years now and I KNOW that interest rates don't mean a thing', well sorry, I might be daft, but I am NOT stupid (well not since lightbulb moment!!), interest rates can make all the difference. If the loan she was offering was only slightly higher than the fixed loan, it might have been worth considering, otherwise, to me, it makes much more sense to take the lower rate and put any extra money into a savings account earning interest until there is sufficient to pay the loan off.

Thank you for the links grumbler, I used the snowball calculator a couple of months ago and found it very useful. Our first DFD showed as 08/11 and now it is great to see that I have managed to get it down to 11/09 just by moving things to better interest rates.

Sproggi