Interest Rates: Everything you ever wanted to know Article Discussion

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  • twwidd
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    I think I've been caught out to the tune of thousands by a thing called "front loaded interest". Somebody please tell me if it's legal or if I have any options.

    I have a poor credit score but a reasonable income and recently bought a car on HP. The interest rate is punishing (24.2% APR) but I made sure I could over-pay the loan, reducing the term and (I thought) the interest too.

    I took the loan out in June and called yesterday to make a payment of 2,000 pounds (almost a third of the amount borrowed) and asked them to re-calculate the term of the loan. The man on the phone then told me the interest was front loaded and that no matter how quickly I pay it off, I will still end up paying 4 years worth of interest (about 4,000). Can this man be right? What can I do?

    Tim
  • welcometomylair
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    Hi,

    I am relatively new to moneysavingexpert.com but thank you so much for this website!

    I have seen that the recommended credit card for 'life of balance' is 3.9% p.a with M&S but having read this thread I am worried that it may cost me more than this (even though there is no balance transfer fee).

    Is there a formula I can use with variables:
    x = principal (original amount borrowed on credit card eg £3k)
    y = interest rate (3.9% p.a)
    z = monthly repayment (eg £200)
    to work out how long it will take me to pay of the card?

    I assume that the interest would be added on each month? Is 3.9% p.a equivalent to 0.319325% p.m.?

    Any help would be greatly appreciated!

    Thanks in advance
  • jamesd
    jamesd Posts: 26,103 Forumite
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    twidd, ask them for an early settlement amount. This must be for the full loan, the rebate law doesn't apply where you just repay part of it. Your best course is to try to accumulate enough money to pay off the capital and a couple of months of interest, which would then be sufficient to settle the loan. An overdraft or flexible loan that allows future overpayments and reduces the capital, even at a higher interest rate, may be one way to raise the money.
  • ljhhuk
    ljhhuk Posts: 46 Forumite
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    I have a couple of these accounts. One with Alliance and leicester which promises an interest rate of 12% and another with Halifax that promises an inerest rate of 7%. I phoned Halifax to ask if I could make an extra payment into my account from my Halifax Plus Saver account that pays 5%, and she said I could not as only one payment was allowed per month, but then she also said it would be better to leave it in the Plus Saver account anyway. I asked her why and she launched into a complicated explanation of how the 7% regular saver rate is calculated and I am beginning to doubt if these rates are as good as they make out.
    Anyone out there know enough about these accounts to explain in simple language exactly how a 7% regular saver rate compares with a 5% normal savings rate?
    Better a pebble given out of love than a diamond given out of duty.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    Take the regular savings amount and multiply it by 6.5 then calculate the interest at the regular saver rate. Now take 5.5 times the regular saver rate and calculate the interest on that at your feeder or other savings account rate. Add up the two amounts of interest. For a whole year you end up gaining by a little over half of the difference between the two rates.

    6.5 and 5.5 are for a one year account. For other periods take half of the number of months and add 0.5 to the months for the regular saver, deduct 0.5 for the other. You can use this to check the effect of starting to move money part way through the year, for example.

    Rules on penalties for taking money out of a regular saver can be punitive, losing a whole months interest, switching the whole regular saver to a lower rate of interest from day one or only possible by closing the account, depending on the specific regular saver account.

    The 7% Halifax Regular Saver prohibits withdrawals except by closing the account. You can change the monthly payment amount whenever you like, so if you're not already at the 250 maximum you could move money gradually from your Plus Saver to the Regular Saver that way, via the account the money is normally being taken from.

    The differences are decreasing at present because variable rates are rising but it still looks like something that is worth doing.
  • ljhhuk
    ljhhuk Posts: 46 Forumite
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    Have I done this right? (I don't think so).
    £100 x 6.5 = £650 x 7% = £45.50

    (I think I go wrong in the next bit because I am not sure what you are telling me to multiply by 5.5)
    5.5 x 7% = 0.385 x 5% = 0.01925 (this can't be right can it?)

    I save £100 in the halifax regular saver and the plus saver pays around 5%

    Could you show the calculations for me please - I am a dimwit!
    Better a pebble given out of love than a diamond given out of duty.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    ljhhuk, if you have £1200 today in the plus saver that you want to drip feed into the regular saver (or will have accumulated any more you need to get there before it's needed) it's:

    £100 x 6.5 = £650 x 7% = £45.50

    £100 x 5.5 = £550 x 5% = £27.50

    Total interest for the pair is £73.
  • ljhhuk
    ljhhuk Posts: 46 Forumite
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    James, thank you for your very useful information. If you think my brain can take it, could you explain the logic behind these calculations? I still think that the claim of 7% is a bit of a con and would rather they told me the apr for both accounts.
    Better a pebble given out of love than a diamond given out of duty.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    They don't sell the accounts as a matched pair, so there's really no reason for them to give a merged AER for the pair. You can calculate the merged rate by diviging the total interest by the total amount deposited and multiplying by 100. 73/1200 * 100 = 6.08% on the whole 1200 over the full 12 months.

    7% isn't a con because that really is the rate being paid on the money in the account. If they were to pay it on 1200 from the first day they would be paying interest on money that wasn't even in the account and which you might not even have yet.

    The logic behind the calculations is working out where the money is each month and then working out the average number of months in each place. It turns out that for an average of 6.5 months the money is in the higher rate account. 6 months is easy enought to see, the extra 0.5 is because it starts at the start of the month and that allows for that extra time at the higher rate.
  • Kernow_Kid
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    A couple of weeks ago I went to see about my Halifax Current Account.
    I had some money transfers to make and thought I would do them in person rather than on the internet as I usually do.
    While I was there I started to look for the interest rates for my account.
    After a short while I realised they were not to be found anywhere.
    I asked an assistant to check and she said 2.5%.
    I said she was wrong as it should be 5%.
    She then said it wasn't, mine had been 3%, but it dropped last September to 2.5%.:eek:
    I said that they had been running a big promotion about it being 5% (now 6%), and that it had been that way for a while.
    She said that it was for new accounts only, and that I had to request an upgrade to get the new rate.
    I asked about the drop to 2.5% and she said it was an across the board rate drop.
    I said I was not informed of this, and would have changed my account for the better one if I had known.:confused:
    She said it was widely stated in the press (I have not read a newspaper for years so could not comment on this).
    I asked why I was not sent a letter stating the rate change and she said it was too expensive to send individual letters out to people.
    I was not happy about that. I clearly pointed out that they send me a personalised letter EVERY month in the form of a statement! Not to mention the junk mail that they bombard me with.:mad:

    I showed her my statement with the interest earned, but it does NOT show the rate of interest. Obviously there is no way I can calculate it due to the money going in and out daily. But when I said that there has been NO form of communication to say that my rate had dropped she referred me to their Banking Review Manager to see if I could arrange my finances better.:(
    To be honest, it seems I can handle my finances better than they can!

    I'm pretty upset about this and wonder if anyone can help me before I go in for this meeting.
    My main points are:
    1 No information that my rate had dropped.
    2 No showing rate of interest on statements.
    3 Can I get the money back that I have lost due to lack of interest, this amounts to several hundreds pounds!
    4 Is this legal what they have done?

    Please help me people!
    Be Pure, Be Vigilant, Behave!:A
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