Overpayments on Loan

Matt1982

Hi All

I currently have a small personal loan for £4000 over a 4 year term (started in March 2012). Due to previous bad credit its on a high interest rate so I am looking to pay it off as quickly as possible with overpayments.

Due to a good month at work I have this week made overpayments totalling £550 (monthly payment is £174.14).

I have just made an enquiry to see what impact my overpayment has had on my loan. The response I have got is that the following:-

"Currently you're £550 in credit on your account which is approximately 3 payments worth. So in effect, if you now start to make your normal payment, there be sufficient funds to enable you to stop making payments 3 months earlier than scheduled"

This has concerned me as I was under the impression that an overpayment is immediately applied against the capital owed on my loan and therefore reduced the interest in total I pay.

Unless i have tottally misunderstood the loan companies response is suggesting my £550 does nothing other than sit there and I get charged the normal interest bar the interest I would save by repaying 3mths early which would be very minimal.

Please can someone help me, I waiting for a response off the loan company but really want to know my facts.

Thanks

jonesMUFCforever

You should have read the terms and conditions of the loan before signing for it.
Most banks would apply the overpayment straightaway and therefore the total interest payable is reduced thus reducing the term.

From what you have typed your loan company do not seem to do this.
If so the best option may be to save the overpayments until such time as you have enough to repay the whole loan.

Matt1982

Thanks for your response. The loan is covered by the consumer credit act 1974 and my understanding is that the same rules applies to all loans.

Therefore my understanding is that under the CCA 1974 that any overpayment is applied straightaway and any interest is rebated is that not right?

Matt1982

Furthermore when I previously asked about overpayment I was told and have an email form the lender that my term would reduce now I being told my overpayments are just held!

Matt1982

jonesMUFCforever I just pulled my T&Cs out. In the section about 'Amount payable on early settlement ' it reads word for word

'you have the right to bring this Agreement to an end at any time by notifying us and making a payment of the outstanding balance plus all future monthly repayments less a rebate calculated under a formula in regulations made under the consumer credit act 1974.

You can also make partial early repayment at any time by notifying us. If you do we will apply the above method for total early repayment pro rata to the amount repaid early. we will adjust the remaining loan term to reflect the payment'

jonesMUFCforever

So what is your question again?
Who do you need to ask?

Try the lender again.

Matt1982

I just want clarification on my thinking. I'm pretty sure I am right but just nice to run it past someone.

Not sure why you have commented on this post as you don't seem to want to help.

Have a good evening.

cos_2

It looks as though the company say they'll reduce the term of the loan if you overpay. This means that you pay the same amount overall, just three months quicker.

It's the bit where you say, " . . . we will adjust the remaining loan term to reflect the payment'.

The term is reduced, not the overall amount.

/Edit I meant to also say a full early repayment WILL trigger a reduction in the interest amount, but a partial repayment won't.

CLAPTON

a full repayment will trigger a reduction in interest
and a partial payment will trigger a reduction
both subject to a adjustment governed by the appropriate legislation

it's the law and it's not optional for the lender

cos_2

Oops - correct Clapton. I nicked this from Tesco:

You can make an additional part payment to your account. There are two ways of doing this, just let us know which way you’d prefer before making a payment:

Your monthly payment can be reduced and the term of your loan will remain the same;

or

Your monthly payment remains the same and the term of your loan can be reduced.

Both options will give you an interest rebate, which means you will pay less interest overall on your loan, but you will get a greater interest rebate with Option 2

So OP needs to check Ts and Cs. He may already be getting the best interest reduction deal.