Front-loaded interest, is it legal?

rkrishna

Hi,
recently I bought a car from a dealer less than two months back and the dealer arranged loan for me through a bank. here is the loan details:

Loan amount: £4345
Duration: 48 months
APR: 23.1%
total interest for the duration: £1817

I want to settle this loan now and I called the bank to get the final settlement figure and they are asking me to pay £215 interest for less than two months saying the interest is front-loaded (which apparently means I pay more interest if I want to settle the loan). the bank says they are actually doing me a favour by reducing the interest to be paid. Can they charge me so much interest like this? Is this allowed? I need to pay this apart from admin charges of £350 (completion and document fee).

CLAPTON

the interest isn't front loaded

when did you take out the loan exactly and when did you make the first payment exactly

the monthly interest will be approximately 4345 x 23.1%/12 = £83 per month

they are allowed to charge up to 2 month interest for early settlement so denping upon the exact details then 215 may be about right

rkrishna

I took the loan on 24-Sep-2011 and I made a monthly payment of £132 already and now they are asking me to pay £4778 (which includes the loan amount, admin charges and remaining interest). actually the interest rate (as per the document it is "rate of interest which apply to the credit agreement") is only 10%, but the APR is 23.1%. don't know what's the difference. moreover, can they charge so much admin fees? it was actually my mistake. my plan was to sell the car back in six months time (moving abroad) and so I opted for loan and the dealer said I will have to pay around £200 interest and I accepted. I didn't read the agreement and signed it (I posted another question regarding this earlier, but this one is a bit different from the earlier one). the bank people told me the interest is front-loaded, but reducing the interest to be paid for me.

CLAPTON

if you took the loan out 24/sep and have made only one payment then you would be due on payment on the 24/nov presumably plus the interest penalty so although 215 may be a little high it's sounds about right

I can't comment on the fees and charges without knowing exactly what the contract says and what they are for.

presumably your contract specifies the early settlement figures

TadleyBaggie

rkrishna wrote: »

actually the interest rate (as per the document it is "rate of interest which apply to the credit agreement") is only 10%, but the APR is 23.1%. don't know what's the difference.

The 10% will be "flat rate", a common practice in the motor trade is to quote the "flat rate" percentage, makes it sound a better deal.

somethingcorporate

So how much was the car? £4,345 + your deposit?

If it was front-loaded that figure would include the £1,817 interest figure.

chanz4

does it also have a setup fee, normaly with hp it does

GlamGirlie

Front-loading interest is perfectly legal, this is how most personal loans and small business loans work.

CLAPTON

GlamGirlie wrote: »

Front-loading interest is perfectly legal, this is how most personal loans and small business loans work.

Depends upon what you call front loaded.

At one time all the interest was added at the beginning of the loan and early repayment still incurred the payment of the full interest.

This was often referred to as front loading the interest.

This is not in general legal now for normal personal loans and a interest rebate will be be given for early settlement.

Obvioulsy monthly interest is higher at the beginning of a loan than towards the end of a loan as more is owed at the beginning.

rkrishna

somethingcorporate wrote: »

So how much was the car? £4,345 + your deposit?

If it was front-loaded that figure would include the £1,817 interest figure.

yes, the interest is £1817.44

redpete

rkrishna wrote: »

yes, the interest is £1817.44

That's the amount of interest you would have paid if you let the loan go to the full term. So the total amount you would be paying back would be £4345 + £1817.45 = £6162.45.

You've said that you've paid £132 and they are asking £4778 to clear the loan now, a total of £4910 - a lot less than £6162.45.

What the bank meant when they said the interest is front loaded is that the interest each month at the beginning of the loan is significantly more than at the end.

CLAPTON wrote:

Obvioulsy monthly interest is higher at the beginning of a loan than towards the end of a loan as more is owed at the beginning.

Maybe not so obvious to everybody.