paying off a personal loan early - surprisingly high balance?

jessej

Hi there,

I took a personal loan for £25,000 10 months ago to pay for a loft conversion. The APR was 15% and the term 8 years (high interest I know, but I had no other options).

I've been making repayments of £444 for 10 months now, so about £4400 in total so far.

Now the loft conversion is done, and I've managed to remortgage this week, and raise enough equity at a far lower interest rate to pay off the high interest personal loan in its' entirety.

I called HSBC to inquire how much the closing balance would be if I paid it today, and much to my surprise they told me it currently stands at £25,100 if I pay it off now!

There should be no early repayment fees aside from one month's interest. I do not, for the life of me, understand how the closing balance is HIGHER than the original amount I borrowed, even though I have been making repayments of £4,400 so far! Where has that money vanished, thin air?

Would be most grateful if anyone could clarify what might be going on here - has there been a computer error? HSBC phone banking were not able to tell me how the closing balance is calculated - not even when I asked to speak to a manager!

Tixy

Was there any PPI taken out with the loan? have your £444s been paying this as well as interest perhaps?
Did you have a period of repayment holiday at the start of the loan?
Any issues with the first payment being taken or anything?
Any bounced DD repayments or anything during the 10months?

If not then based on your figures it would seem the outstanding balance should be just under £24k. You need to get a full statement of account from HSBC.

wee_plumb

Hiya,

Just a guess here but the interest on the loan may have been front-loaded with no early repayment options.

Effectively for the last 10 months you have been repaying interest and not capital.

More knowledgeable ppl will probably be along soonish with personal experience/knowledge of these things and may be able to offer an alternative viewpoint.

I would have expected the manager to have been able to explain it more clearly though.

HTH

Common_Sense_2

Interest Front loaded so your opening balance would have been 96 (8 years of 12 payments) x £444 = £42,624.

You've made 10 payments totalling £4440 which gives you a current balance of £38,184 - this is how much you would pay back if you didn't settle early.

the early settlement figure you've been quoted is £25,100, so that is a saving of £13,084 in the long term by paying it off early.

CLAPTON

wee_plumb wrote: »

Hiya,

Just a guess here but the interest on the loan may have been front-loaded with no early repayment options.

Effectively for the last 10 months you have been repaying interest and not capital.

More knowledgeable ppl will probably be along soonish with personal experience/knowledge of these things and may be able to offer an alternative viewpoint.

I would have expected the manager to have been able to explain it more clearly though.

HTH

this would be totally illegal

de1amo

i am contemplating taking a personal loan like this--is this common practice from high street banks??--like the op i will probably convert the loan to a remortgage asap

jessej

So I've had the loan since July last year, first 3 months was holiday, started repayments in October. I've made 10 monthly repayments to date of £444, no defaults or missed payments, and still the closing balance to pay the loan off today worked out to be £25,176.

I paid it all off over the phone today, didn't want to be stung any longer.

This time I got through to a manager, who explained that the loan is front loaded, even though I originally borrowed £25,000, they work it out as if I borrowed over £40k (which is how much it would be in total with interest, were I to pay it over the whole loan period of 8 years.)

I don't think that is a fair way of calculating the amount of my borrowing, when in branch they clearly stated that I'm borrowing £25k with 15% APR.

I still don't understand how a £25,000 loan can turn into £25,176 early settlement after one year, when I've paid £4,400 in repayments so far??

I'd like to get to the bottom of this - if they have been in the wrong, I should be refunded any overpayment.

Tixy

Its the first 3months holiday that have caused your balance to be higher than you borrowed.

At the end of month 3 you owed £25k plus an extra £950 in interest from those 3months, so at that point your owed £25,950.
Since then your balance has been coming down a little each month (eg month 4 you paid £444 but the interest would have been £324 so you paid off £120 from the capital that month).

Based on these figures your loan balance after 10 repayments would have been just under £25k, but with one months interest as a penalty (which is standard) it took it to just over £25k.

So their figures look correct.

jessej

Thanks Tixy!

Still boggles the mind, I guess I should have looked into the relation of interest/capital repayments before I signed the dotted line, or should have just paid off the loan earlier.

Oh well, live and learn - will be the last time I'll be taking a high interest personal loan!

CLAPTON

unfortunately a payment holiday of three months doesn't mean it's an interest free holiday as Tixy has calculated for you.

jessej

Got it. Thanks Clapton and Tixy, this has really opened my eyes to front loading interest.

I've got another question for you since you both seem to really know what you're talking about!

I'm about change my mortgage product to Santander from A&L - since it's now the same bank, and Santander are offering better rates than I currently have, for A&L mortgage customers, without early redemption penalties.

Should I go for a lifetime tracker, and aim to stay with that same product over the whole course of the mortgage, and try to overpay as much as I can early on in the mortgage?

I read somewhere that the front loading happens every time I refinance the mortgage - ie. borrow more or move the mortgage to another bank or product - so I'm guessing I should avoid that by staying with the same lender and product over the course of the mortgage?