Does overpaying on a loan reduce the interest paid?

The_Boss

Hi all,

I've got a loan over another 42 months, 7.9% APR paying £208 a month.

I can now afford to repay much quicker, which I estimate at 16-18 months.

The loan is with Tesco bank, who recently wrote to me advising that I can make overpayments as often as I like, with no fee for doing so.

In the letter, it says that the duration of the loan would not change, but I want to repay this sooner and have looked at other options involving saving in an ISA until I can settle or doing a super balance transfer.

The question I have is...if I do overpay on my loan every month, will this reduce the interest I pay until the loan is paid off?

lawrie28

If you have a fixed rate loan, then generally no - he amount of interest is calculated at the start of the agreement, with it being recalculated if you make early repayment in most instances. The only way to know for sure would be to ring tesco and ask them.

If it doesn't reduce the amount of interest you pay, then you would be better squirreling your extra payment away in the highest interest earning account you can, and then when you have enough to settle the loan doing that, as that will save you interest.

This was also gives you the flexibility that if your circumstances change before the loan finishes you have a nice lump tucked away that you can use for anything, not neccesarily to repay the laon.

The_Boss

Thanks for that. I spoke to them the other day but did not obtain this information. They have given me a payment schedule for the next 42 months that shows the monthly payment, how much of this is capital payment and how much is interest payment. My monthly payment is £208, and the interest payment reduces every month, with the capital increasing, until it is finally paid off.

lawrie28

If they work it out this way, they you may find tht they do reduce the interest.

CLAPTON

what exactly did the letter from tescos actually say?

from 1st Feb 2011 the new EU rules about loans change the rules about overpayments. however, I'm unclear whether they are retrospective for exisitng loans

The_Boss

CLAPTON wrote: »

what exactly did the letter from tescos actually say?

from 1st Feb 2011 the new EU rules about loans change the rules about overpayments. however, I'm unclear whether they are retrospective for exisitng loans

It said I could now request a statement at any time and now overpay at any time. This would not change the length of the agreement, just the monthly payment would be recalculated for future payments.

I called and asked about this, and they said there is no fee to make an overpayment.

CLAPTON

The_Boss wrote: »

It said I could now request a statement at any time and now overpay at any time. This would not change the length of the agreement, just the monthly payment would be recalculated for future payments.

I called and asked about this, and they said there is no fee to make an overpayment.

well, their website says that interest is charged daily so it would appear that overpayments will reduce the interest charged

jonesMUFCforever

The new rules only apply to new loans taken out from Feb 2011 so are not retrospective.