Sainsburys Loan - Interest Charged on Daily Basis??

tony58_3

are there any loan companies whose interest isnt front loaded?? or is that how it just work?

LeeSouthEast

I dislike the "use a credit card for emergencies" argument. What if the emergency is a job loss? Then what?

CLAPTON

tony58 wrote: »

are there any loan companies whose interest isnt front loaded?? or is that how it just work?

All loans must comply with the CCA rules.

This means in essence they are calculated like this

Each month your monthly payment comprises... the interest for that month plus a capital repayment

so for example
loan of 10,000
apr 7.9%
period of loan 84 months
monthly payment 154

so in the first month you still owe 10,000
so you pay interest of 10,000 x 7.9% / 12 = £64
and repay capital of 154 - 64 i.e. 90

so in the second month you owe 10,000 - 90 = 9,910 (corrected from original post)
so the interest is 9,910 x 7.9% /12 = about 63
and make capital repayment of 91 so you now owe 9,819

so the third month you pay interest of 9819 x 7.9% / 12 = about 62


and so on and on
each month the interest gets less and the capital repayment gets more


This seems entirely fair and reasonable in fact exactly like a mortgage. If you owe more then you pay more interest, when you owe less you pay less interest
Thats how all loans work.

And by the way, having interest worked out daily does NOT mean you pay more interest; its the APR that determines the interest.

So you need not fret about daily interest (a totally good thing) nor about front loading (which is a meaningless term anyway).

CLAPTON

milan_ns wrote: »

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.

I think you are confusing charging interest daily which virtually all CCs, ODs, mortgages, loans do and how the interest charge is compounded.
They are quite distinct.
So e.g it's perfect normal to work out interest on a daily balance but the interest is only added to the debt once a month (how most CCs work)

In any even APR takes into account how the compounding works so two loans with the same APR will charge the same interest irrespective of how compounding is done.

milan_ns

I guess if you look at APR there is no difference whether interest is charged daily or monthly.

But if you look at nominal interest of 5% on £1000...

a) daily interest

1000 * (1 + 0.05 / 365)^30 = £1004.26 owed after 30 days


b) monthly

1000 * (1 + (0.05 / 12)) = £1004.17 owed after a month

Difference is tiny, but it's there.

ViolaLass

You're not comparing like with like - the average length of a month is 30.416 days (365/12) and then the calculations come out the same because, after all, a month is a month.

CLAPTON

milan_ns wrote: »

I guess if you look at APR there is no difference whether interest is charged daily or monthly.

But if you look at nominal interest of 5% on £1000...

a) daily interest

1000 * (1 + 0.05 / 365)^30 = £1004.26 owed after 30 days


b) monthly

1000 * (1 + (0.05 / 12)) = £1004.17 owed after a month

Difference is tiny, but it's there.

your maths is correct as far as compounding is concerned

but the point is that because a financial product calculates interest daily, this doesnot mean that it compounds the interest on a daily basis

so virtually all savings products work out interest on your daily balance but there is a wide variety of choices about componding... so the interest can be added monthly, quarterly, half yearly, yearly etc

Rob71

Like everyone else has said, think of it in terms of a mortgage - at the beginning you're paying mostly interest and very little off the principle/capital.

At the end you're paying mostly capital and very little interest.

That works well if you doing this over a fixed term (e.g. 5 years or 25 years).

If you were to (say) overpay your mortgage by £5000, then you would either reduce your monthly repayment amount *or* pay fewer instalments.

If a loan was truly front loaded, then all of the interest for the original term would be charged up front and you would have to pay that *before* you made a dent on the capital. On a five year loan this would mean you would not pay off any capital until the 2nd or 3rd year. Like other people have said, this doesn't happen on loans regulated by the consumer credit act.

In reality, having daily interest charged means that if you rang up for a settlement figure mid-term they'd work out what capital you've repaid and add on the interest you've not paid that month (the daily interest bit) and then add on the 28 days penalty interest.

It is in your interest (excuse the pun) to repay the loan as soon as you can comfortably afford to do so - this will save you interest payments. You might have to clear the entire balance in one go, rather than making one off payments. Whether that's the case or not is something you'd need to discuss with your lender.

HTH

milan_ns

CLAPTON wrote: »

your maths is correct as far as compounding is concerned

but the point is that because a financial product calculates interest daily, this doesnot mean that it compounds the interest on a daily basis

so virtually all savings products work out interest on your daily balance but there is a wide variety of choices about componding... so the interest can be added monthly, quarterly, half yearly, yearly etc

I though daily interest implied it's compounded daily. Oops

ViolaLass wrote: »

You're not comparing like with like - the average length of a month is 30.416 days (365/12) and then the calculations come out the same because, after all, a month is a month.

I didn't want to bring in more decimals places to confuse people. But if I were to compare a month to 30.416 days, this would actually mean that daily compounded interest results in even bigger difference, not smaller.

However, this is all irrelevant now that CLAPTON has explained that interest in not compounded daily

dannyjebb

so in the second month you owe 10,000 - 90 = 9,940

I hope your not an accountant hehe