Sainsburys Loan - Interest Charged on Daily Basis??

tony58_3

i have just accepted for sainsburys loan, for £10k at 7.9 over 7 years, its for home improvements, i could have used my savings, but did not want to incase i need them for a rainy day. but i had all the intentions of paying the loan off early. so hense i was 50 50 as on most loan interest is front loaded.

However after speaking to them, its come to my attention that their interest is charged daily, so if i do pay the loan off i wont be penalized, but ofcorse there is the 2 months interest charge as penailty, which i'm fine with.

is this info correct?? or am i missunderstanding something??

am i right in thinking it is better to NOT go for a front loaded interest if i have intentions of paying early??

thanks in advance.

Rafter

All unsecured loans regulated by the consumer credit act are not allowed to front load interest and as you have stated are allowed to charge maximum of 2 months penalty interest for early settlement. Interest will be calculated daily in general or monthy at worst and either should make no material difference to the amount you pay.

Remember though that if you repaid after 3.5 years (ie half way through) that you are likely to still owe more than £5,000. Because you are borrowing more at the start, more of your monthly payment goes towards paying interest than paying off the loan amount.

Given you can earn about 3% after tax on savings - you are effectively paying 5% extra for the flexibility or £1,750 over 7 years. Would it not be cheaper for you to take out some insurance or get a credit card as your rainy day fund? Banks love customers like you who borrow at the same time as saving - effectively paying them a tax for the privilege!

Good luck

R.

tony58_3

Rafter wrote: »

Remember though that if you repaid after 3.5 years (ie half way through) that you are likely to still owe more than £5,000. Because you are borrowing more at the start, more of your monthly payment goes towards paying interest than paying off the loan amount.

ok i really dont get that bit, i thought the benefit of having Daily charged interest loan was that the interest is distributed equaly across the monthly payments, so if i settled exatly half way through the loan, what would be the reason for me owing more than half of the capital??

:mad:

[Deleted User]

look at it like a repayment mortgage,in the early years most of what you pay is interest,in the later years its capital

jonesMUFCforever

tony58 wrote: »

ok i really dont get that bit, i thought the benefit of having Daily charged interest loan was that the interest is distributed equaly across the monthly payments, so if i settled exatly half way through the loan, what would be the reason for me owing more than half of the capital??

:mad:

No No No
Say you borrow £10000 at a rate of 10% - the monthly interest at month 1 would be approx £85.
At say month 60 of a 5 year loan the interest would be approx £8.
Your repayments will be the same throughout the loan so more capital is repaid later on than at the beginning.
You can reduce total interest charged by overpaying if they allow it.

milan_ns

tony58 wrote: »

ok i really dont get that bit, i thought the benefit of having Daily charged interest loan was that the interest is distributed equaly across the monthly payments, so if i settled exatly half way through the loan, what would be the reason for me owing more than half of the capital??

:mad:

In order for owe half the sum exactly half way through the term your repayments would initially need to be much higher and then dwindle as you pay off the loan.

Take as an example a loan of £10k over 60 months @ 5%

Capital repayment: £10000/60 = £167 (per month)

Interest: 5/12 = 0.42% on outstanding amount

Let's see how payments would look like:

Payment 1 = 167 + 42 = £209
Payment 10 = 167 + 36 = £203 (amount owed has shrunk and so has interest)
Payment 60 = 167 + 0.70 = 167.7 (amount owed has dwindles so much that now interest is only 70p)

This is all just hypothetical though. No bank would offer such a loan. They prefer to keep payment amounts constant.

tony58_3

Right sainsburys told me that its daily charged interest rare and NOT front loaded so i was under the impression,

£10 over 60 months,

total interest charged over 60 mnths £2000, hense total payable back £12000

so monthly repayment with that say for example £200 (12000/60)

and of the £200 monthly payment £33 would be the interest each month (£2000/60)

so after 30 months, i wou,ld have paid £5k off the capital, and £1k off the interest??

is that NOT how it works? have i been completly missing the point??

so are there any real practical advantages of having a daily charged interest loan over a front loaded interest rate loan?

:mad:

milan_ns

See here how amortization looks like (£10k loan over 60 months @ 5%):

http://loan-amortization.appspot.com/?b=10000.00&r=5.00&t=60

Daily interest means you'll pay MORE than if interest was calculated monthly (in other words you'd be paying interest on interest).

Sounds dodgy, but the difference in total amount paid is negligible.

tony58_3

damn and there was me thinking its better to have daily charged interest lol

however having said this, is daily charged interest rate still better than front loaded?

ViolaLass

I'm confused - aren't all loans where you pay a fixed amount per month 'front loaded'? It seems obvious to me that you would pay more interest at the beginning when you owe more money.

tony58_3

Right i got the agreement today, and just been going through it, and just read a line saying "Interest is applied at the start of the Total loa"

and im guessing thats frnt loaded??

and the lady when i spoke to her over the phone clearly stated to me that IT IS NOT FRONT LOADED!!!!