Early settlements

newsaver_3

Hi, this is a question for all you financial wizards

Just had a 10k loan application approved by AA @ 5.8%. Repayment over 7 years (so's I'd have smaller monthly payments). According to paperwork I expect to be repaying total of £12265 by end of loan period. However, I may be in a position to repay the 10k in 12-18 months and mentioned this to the operator at the time of applying. She then replied she didn't know fully how the system worked but thought that I would only have to pay 2 months interest at most if I decided on early settlement. Is this true or are they just desperate to get me to sign on the dotted line and then hit me with huge penalty fees later? Can't see anything on the paperwork re: this either. Does anyone know how the system works and how much I would have to repay (whether just 10k or the full 12k)? Or should I apply for a post office loan whch appears to be more flexible but higher rates (of course)? Not sure I would get PO loan either so do I just stick with AA? Any help greatly appreciated. ps...it's urgent!

Sherrybabe

BenL

In the T&C's there should be a section on early settlement.

Usually mentions rule of 78 which is the crafty calculation they use as at the start of the loan your payments go more towards interest than capital.

If you search in google for "rule of 78" a link comes up for a university/college in america that has a calculator you can enter your details in and it will break the costs down for you.

Ben

zcaprd7

5.8% is a cracking rate though - rule of 78 is one angle, fees are another.

If there are no fees for settling early then you 'should' be OK, but be aware that because of rule of 78 they will get you to pay more of the interest up front...

EDIT: It 'might' be worth applying for the 3.9% life of balance Texaco card that will be ending soon and getting the cash off that (via a super balance transfer card) - higher monthly repayments (3%) but lower rate and more flexibility.

nutmeg

you usally have to pay 2 months interest, but there is a way round this.you can make a payment for all but say £10 of the loan, the phone up bank and tell them you want an early re-settlement figure based on what you owe (£10) and then they can only charge you interest on the £10. all perfectly legal

Xbigman

you usally have to pay 2 months interest, but there is a way round this.you can make a payment for all but say £10 of the loan, the phone up bank and tell them you want an early re-settlement figure based on what you owe (£10) and then they can only charge you interest on the £10. all perfectly legal

However, not all loans allow this. So check those terms and conditions again. If allowed, be carefull not to try and cut it too close and overpay. They then call it a settlement and charge you interest.
Regards


X

Robert_Sterling_3

I calculate that your monthly payments are about £102.21
After 18 m,onths you will have paid £1839.75

There is a formula for the rebate of interest on early redemption

Amount rebated is I*M*(M-1)/N*(N-1)

* means multiply
In our case here I is £2265 the total interest charged.
M is 102 The number of months still to go at redemption
N is the total number of months of the loan in this case 120
But the lender can reduce m by 2 months.

So worst case under rule of 78 is that the rebated interest is

£2265*100*99/120*119

£1570.27
You will have paid back 18*102.21 = £1839.78

Settlement figure is

£12265-£1570.27-£1839.78 £8894.95 Approx.


My fee £25
MSE Rebate £25

Balance Nil

Robert Shilling ..... Don't take my word for it.
Ask the lender.

newsaver_3

Thanks to everyone for your help & advice - especially BenL and his rule of 78. AA do apply this rule and so I checked it out via search engine first (the figures were spot on)....so at least I know what/how much I'm letting myself in for. Ta again
SherryBabe

CTT_2

I had a loan with LLoyds over 7 years but paid off after 12 months. I paid sent them a cheque for most of the outstanding balance and left about £50 outstanding. I then phoned them and got an early settlement figure and this was based on the £50.00, so I ended up paying about £1.00 in early fees.