Help! Save me from the evil car financer!

twwidd

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 right 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 was 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, 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

grumbler

Sorry, cannot offer anything constructive ...

http://www.oft.gov.uk/Consumer/Hire+purchase/default.htm.

Some extracts:

Read the small print
The HP contract you are given to sign must state in plain language what is expected of you and how much you will pay. You should read the contract carefully and only sign it if you are completely satisfied.
....
If you've already signed an HP contract which you think might contain unfair terms, seek advice. See the Unfair terms in consumer contracts area of this website for more information
....
Ending your contract early
If your HP agreement is for under £25,000, you have two ways of ending your contract early:

• You can terminate an HP agreement and return the goods at any time by writing to the lender, as long as you bring your total payments up to half the price of the goods (the exact amount will be stated in a box on the front of your contract). ...
• You can also pay off your loan early ... and keep the goods. Contact your lender and find out how much this will cost. You will be entitled to a rebate on future charges. There are rules on how this is calculated. Credit agreements should include examples of how much it will cost to pay early at different times.

I think it is time to read at last the HP agreement you have signed...

twwidd

There we are. I have read the contract. I believe either the man on the phone is wrong, or the contract is so misleading as to be unfair.

It says " If you exercise your right to settle this agreement early you migh expect to pay, if you settle;
after a quater of the term has elapsed 7,271.54
after half the term has elapsed 5,659.33
after three quaters has elapsed 3,278.35

The above small print was reassuring when I signed, especially given the salesman told me I could make overpayments; he advised against saying I should keep paying for at least 18 months to improve my credit rating.

On signing, I thought the above amounts refered to what I would have to pay in order to settle the total loan (7,064.00). If the phone man is right, do the above amounts refer to extra payment above and beyond the remaining capital on the loan? He has twice promised to get back to me but failed to do so. I have tried calling Trading Standards for advice but they seem to be out.

Does anyone with experience of these things know what the small print means? I have found out why my credit score is so low (on this site) and beleive I could get a much cheaper loan if only I could escape this one.

Any help would be appreciated, any criticism would be devastating (I know I have been a fool).

regards

Tim


p.s. Thanks for the link

grumbler

I am not an expert...
For me this clearly means that (assuming that the loan was for 4 years) after making 12 monthly payments you can settle the loan in full by making a lump sum payment of £7,271.54.

I cannot imagine that this wording could mean anything else.

P.S. The remaining balance after 12 months would be about £5875. Difference £7271-£5875=£1396 is in fact the early redemption penalty. My estimation is that in this case you pay in total £2980 interest+penalty on £6470 average balance during the first year. This equals to about 46% APR. Do they want to penalise you even more?

tomstickland

If it really does have front loaded interest then don't make any attempt to pay it off early since you've already been charged all of the interest. Put the money into a high interest account.

billywhizz

Up until 2005 finance interest was front loaded by something called the "rule of 78ths". The rules for agreements regulated by the Consumer Credit Act have changed.

The 1/4, 1/2 and 3/4 term figures you quote are the total amount you would have to pay to discharge the loan. So after 12 months pay £ 7271.54 and the loan is closed, that figure should be less than the total amount of payments you would still have to make (36 x £ monthly payment). This is in line with the new rules.

As for making a lump sum payment of £2000, there is no real benefit, put it in an account as tomstickland suggested, HP is not like a mortgage, the rate is fixed, if you pay £200 now then the loan will finish (£2000 divided monthly payment) early, but there will be little reduction in the interest charges, charges will only be reduced at the point where you can pay the whole loan off in full, not part of it.

HTH.

Mr._Bish

As from October 1st (As far as I am aware) the Consumer Credit act 2006 states that if any terms of an agreement can be deemed as unfair then the agreement is uninforcable.

I have no idea if yours qualifies but it may well be worth visiting a CAB office who can inturn put you onto a solicitor who can write you a letter with government supplied legal aid. My guess is that if the HP company thinks that you may take this further they will drop their charges fast.

Good luck. In my opinion this type of interest loading is immoral and totally unfair. It is probably (Since the rule of 78 has been dropped) totally uninforcable. If your agreement was written after May 2006 they I can 100% guarentee that you will win. At that date all HP and consumer loans had to have the early settlement figures cast in stone from the outset.