Fixed Sum Loan - Advice Please

lily_my_lovely

We had someone round from Dolphin Bathrooms last night who we had asked to quote us for the a new bathroom. We were happy with the price and decided to go for it... and then he asked how we would pay. I said cash/cheque (we have the money saved.)

He then said he could give us a further 15% discount off the price if we took out a credit agreement...

The loan is a "fixed-sum loan agreement" and we were told by the salesman that we could pay it off early and the penalty for doing that is just one months interest on the outstanding balance.... but if we reduce the oustanding balance by paying a lump sum in the first month the interest obviously would be small and much less than the extra 15% discount we were recieving.

Anyway my question is there is a section in the document:- "if you exercise your right to settle the agreement early the following amounts will be payable for every £1000 borrowed

When 1/4 of the term has elapsed £915
When 1/2 of the term has elapsed £744 ..."

Does that mean if we pay the loan off early (as we plan to do in the first month) we have to pay the above amounts in leiu of interest lost?

Or... it is clearly documented that the bathroom is £8600 and the total interest payable will be £10718, (yes I KNOW! Its over 10 years but salesman said irrelevant to as we would be paying off in the first month) is the earlier settlement figures based on the £19000 (so you would pay £915 of each £1000 borrowed to settle early? (£17000 odd)

I'm scared of the loan as I think we have been stitched but hubbie says that the "man wouldn't have blatantly lied about being able to pay it off in the first month and only pay one months interest". (He's a trusting soul my hubbie!!)

My problem is I don't think he did lie... I think we will be able to pay it off in the first month... all £19000 of it!!

Can anyone explain "fixed sum loans" and early settlements... and generally just help! Thanks in advance.

beanielou

Be very very careful.
salesman will get commission on the sale of credit.
Not to put to fine a point on it I think he may well have misled you.
Check agreement carefully to see if there is a cooling off period and exercise your rghts in that area
HTH

raithrover1976

Since the original message was posted some years ago, we'll assume everything worked out ok, but i'll post this for the benifit of anyone who has signed up for a fixed sum loan and is now reading the white copy and worrying about just how much it's going to cost and what they've got themselves into.

In the above example, the salesman was telling the truth. A fixed sum loan works in much the same way as an outstanding balance on your credit card. Interest is calculated monthly on the REMAINING balance, rather than being calculated at the start of the term and spread evenly throughout the payment terms. You are normally charged 30 days interest on the final payment so if you have £500 to pay off, do it over 2 months. Pay off £495 one month, then they'll only charge you 30 days interest on £5.

You will only pay the full amount of interest, shown on the white copy of your agreement, if you pay the minimum monthly payments over the whole 10 year term. It's best to go into one of those agreements with a few grand saved up and pay off a whack right at the start of the term, this will drastically reduce the interest you will pay from that point onwards. You will be advised of the account number and sort code of the account into which you can use you online banking facility to make additional payments.

The settlement figures shown on the argreement mean just what they say, after 1/4 of the term you will pay, eg £915 for every £1000 borrowed, so if you borrowed £10,000, you would pay £9150 to settle the agreement after this period. The reason it looks bad after you're 1/4 of the way through the term is because, by paying the minimum monthly payments up to this point, you have been paying mostly interest and only just nibbling into the actual loan amount, similar to a maxed out credit card.

In summary, these agreements are good if you have a few quid behind you to start with and can afford to pay them off quickly, otherwise you are going to be paying a lot of interest and saddled with a loan for a long time.

I post this after singing up for an agreement just like the one above (to fund a new kitchen) and jumping to the same conclusions as the original poster. A quick phone call to Barclays put my mind at ease and confirmed what the salewoman had told me was 100% correct.