How do I know if a loan's interest will be front-loaded?

LouBLou_2

Having got myself into a large amount of debt, I've ended up with two loans; one of which has an APR of around 24% :eek:.

I've been doing really well over the last year: paying off my credit cards in full and paying extra on my loans. My credit rating is now really good so I was thinking it was time to look around for a better-value loan to cut the time it'll take me to pay off the rest of my debt even further.

In order to make sure I'm getting the best deal, how do I find out which companies front-load interest on their loans? Because I'm able to pay off extra from time-to-time I don't want to be stuck paying interest on the full balance even when I'm bringing the loan amount down quite quickly.

One loan in particular I'm looking at is Sainsbury's who are offering typical rates around 8% but that might not end up being as good a deal for me as it seems...

I'd appreciate any advice anyone can give me on finding out more before I apply.

Thanks,
Lou

CLAPTON

all normal loans are regulated by the CCA and the method of charging interest is regulated too.
that means that all loan apply the interest in more or less the same fashion
so if you wish to pay off the loan early then the maximum charge is determined by the CCA rules

however the CCA rules do not say that they must allow overpayments, some loans allow overpayments and some don't
unfortunately many websites don't make it very clear and you will need to dig a little deeper
Egg for example allows very flexible repayment that reduce the interest charged although I'm not sure if they are lending to 'new' customers.
often the key word is 'flexible'

LouBLou_2

Thanks for this advice. I was told by my existing lender (so, not exactly impartial advice!) that it was something to look out for when shopping around but I couldn't find any way of finding the information. Lenders are fairly up front about early settlement fees but not about how they charge interest or what they charge it on.

If a lender says they calculate interest daily, is this more likely to be 'fair' or, in my case - more suitable for my needs?

CLAPTON

the early settlement fees are limited by the CCA rules to 1 or 2 months interest ...so not vey much

some charge nothing like EGG

so eerly settlement is not really a problem anymore (it was before 2005 which is why people use terms like front loaded) but now all settlement fees must be calculated according to the CCA formula

however, it's the overpayment bit you need to check out because the CCA rules don't apply there.
Its probably the case that if they don't say you can overpay then you can't

LouBLou_2

Thanks again Clapton.

When I get close to paying off the final balance I'm planning to pay all except a small amount so that (hopefully) the 2 months' interest I will need to pay as a settlement fee the following month will be a very small amount. It's a tactic I've seen mentioned elsewhere in these boards and I'm hopeful it'll work. If not then I guess it won't be too much anyway but it's got to be worth a try to save a few more pounds!

My bigger concern is taking out a new loan for say £10000 and being charged interest on the full amount over the planned duration of the loan up front. Then if I pay off lump sums of £2000 every now and then it won't count for as much as if the interest was always calculated only on the outstanding balance.

I've come across a few lenders who make it clear that they front-load (Alliance & Leicester is the main one that springs to mind) but it's not always easy to find out. It seems that a few lenders front-load interest and most allow you to settle early - I just need to dig deeper or make some phonecalls to find one that doesn't front-load, does allow cheap-ish early settlement AND has an APR of under 10%. There must be one out there somewhere...

CLAPTON

I have no further ways of explaining things but

A&L do NOT NOT NOT front load in the way you say. It would be illegal.
and

ALL ALL ALL normal loans (un-secured) allow early settlement with the ealy resetttlement fee calculated in line with the CCA rules.

LouBLou_2

I'm taking early settlement fees as separate to how the interest is charged (as do all lenders). I'm not disagreeing about the early settlement fee itself but about how much interest I will pay overall if/when I settle early.

Maybe I'm misunderstanding A&L's own T&Cs then which say "The interest charged is added to the total loan at the beginning of the loan term"..."This results in a larger amount of interest being attributed in the early months of the agreement than in the later months".

To me this means that it doesn't matter how fast I pay it off I will always pay ALL of the interest no matter what.

CLAPTON

The A&L is indeed badly worded but no it doesn't mean that.

For early settlement you will pay the remaining capital amount plus 30 days interest.

Unfortunatley the way that the CCA calculation is worded is very confusing as it sort of adds all the interest on and then gives a rebate for early settlement.

The net effect is you pay the capital outstanding plus a months interest.

Do remember however, that you do pay a lot of interest in the early months as it based on a daily balance which obviously is much higher in the early months than the later months.

asandwhen

I have had loans with Lloyds in the past and they charge there interest on a daily basis and allow you to make over payments -

I now have a loan with sainsburys and they also allow overpayments but the interest is calculated monthly (the day before payment is due) so this would make it very slightly more expensive if the APR rates were the same but as you will know Sainsburys is lower APR (typical) than Lloyds so is the better option (even though they are now the same company)

When I went to pay the Sainsburys cheque into my bank account (Lloyds) I was asked into a meeting with my bank manager who tried to sell me there loan instead (even though they are now the same company) her sales pitch was pretty much the fact that they dont calculate there interest daily - So when you make a payment the interest is calculated with lloyds at the new amount from the next day and from Sainsburys the next month resulting in very slightly higher interest. I pointed out to the bank manager that if they were willing to lend at the same rate 7.9% then yes it would be better to get the Lloyds loan best they could offer was 9.9% which made sainsburys much cheaper.

I must say that I have found Sainsburys very easy to deal with - although 1 word of warning they will try and tell you that you have to pay a £49 admin fee for getting the documents to you - Say that you do not want this and the post is fine (still came next day anyway). Also you will not get the hard sell on PPI with sainsburys as they no longer offer it.

Im not sure if I have explained myself very well here but hope it makes a little sense.

lauralli

just been on the phone to a&l to get a settlement figure and it didnt match what i calculated. went to make a complaint and was informed that the loan WAS FRONT LOADED and it did say in the contract at the start of agreement that we signed? are you saying this is illegal. the loan was taken out feb 2007.

opinions4u

lauralli wrote: »

just been on the phone to a&l to get a settlement figure and it didnt match what i calculated. went to make a complaint and was informed that the loan WAS FRONT LOADED and it did say in the contract at the start of agreement that we signed? are you saying this is illegal. the loan was taken out feb 2007.

No it's perfectly legal. Perfectly logical. Perfectly normal.

At the start of the loan the debt is higher. So interest charges are also higher.

As the debt gradually reduces the amount of interest charged also gradually reduces.

(PS best to start a new thread rather than dragging up an old one ).