HELP!! So confused on interest i will incur on overpayments on secured loan.

jswill100

Hello all,

I am quite new to all this kind of thing, and am having real trouble understanding the terms of my agreement that I am on the cusp of accepting with Nemo Personal Finance.

They are offering me a 9.5% PA and 9,9% APR on a 13k loan I want to debt consolidation, with no fees at all, over 5 years. My repayments with be a mere 277 a month which all ends up looking alot better than what I am dishing out on around 11k of credit card debt.

I am in a bit of a pickle - whilst I have a reasonable credit file in general, no one will give me any new credit cards right now (I would prefer to be doing 0% balance transfers), as I have had too many rejected applications and too much overall credit. I have also been rejected for unsecured loan, so this seems my only sensible option. This is by far the best offer I have had - most other (even secured) loans seem to be throwing up between 14.9-24.9& APR!!!!

I also consider it safe - I have plenty of income and also a buy to let property, so I can easily afford to repayments and intend to pay off a good amount, perhaps an extra 500-1000 PCM for the duration.

Here is the rub - I just don't understand what they are telling me about the overpayments. I am allowed to make payments of 500 or more every month, but the documents are not clear, nor are the customer service personal. They have told me that I will incur something along the lines of (I may be a tiny bit muddled):

2 months interest on the capital overpayment as if I had settled the loan early when I make overpayments. They also keep using the term "on a pro rata basis". I have a loose understanding of the term but my mind is just a bit muddled in this instance.

The only thing the documentation refers to is some kind of formula in the consumer credit act 1974 - I am afraid I find this kind of thing totally impenetrable and would really love it if someone could explain this all to me.

Are they saying that, if I make a 500 overpayment, they sort of use this as the overall loan figure, and work out what 2 months interest at 9.9% APR would be on 500, charging me this instantly? So if I might look at incur about £50 interest on 500 over the course of a year, for two months I would be looking at more like £8.30. I had a customer service guy tell me I might expect to pay £5 on a 500 overpayment, but with little explanation of why.

If that is right, then over the full term, because the majority of the 13k I intend to pay via overpayments, I might make say 8k of overpayments, which might incur me around £133 of interest - not something I would be too concerned about at all.

I am just very wary of entering into a long term agreement if i am going to really regret making overpayments - which is the whole idea really (to not be locked into high payments, but have a choice to overpay heavily and get the thing paid off in 1-2 years, but leaving me flexibility to repay slower if i need to save for something else).

Thanks alot
John

pheonixrising21

It does sound like they will charge you two months interest on the overpaymants and each overpayment must be a minimum of £500. They use the term "pro rata" because they charge interest on the overpayment in the same way as if you had settled early. Early settlement usually incurs a couple of months of interest (rather than the interest left to pay over the remaining term) and so overpayment incurs this same charge, just "pro rata'd" down from the full amount to whatever the overpayment amount is. E.g if you owe £11k, 2 months interest at 9.9% APR will incur around £180 to settle early. If you overpay £1000 (1/11th of the total outstanding), you will pay 1/11th of the interest that would be charged if you settle in full - so about £16.50

Of course, although you will be charged two months interest per overpayment, you will save interest for the rest of the term of the loan e.g an overpayment made in month 2 (58 payments left) will save you interest for 56 months on the amount overpayed.

The other option if you are not sure of the overpayment option, is to save your £500-£1000 per month in a savings account and then settle early. This won't save you as much interest (unless you can find a savings account paying more than 9.9%!!! - please PM me if you do!), but will be simpler to manage.

A final option would be to "snowball" your debts if you have multiple cards. Here, you pay off the minimum +£1 on all cards and then choose one to throw all available cash at until its gone, then move on to the next. Start with the highest APR and work down, cancelling the cards as you pay them off. Once you get down a card or two, 0% APR offers may become open to you, which may save you more money in the long run... although its not guaranteed, whereas the savings from this loan is guaranteed over your current situation.

jswill100

That is all really clear and helpful - thank you very much!!!! I feel more at ease now that there is not going to be any massive headaches in overpayments. I need to talk to them again, but it actually looks as if I can pay sub-500 overpayments without incurring this cost, which is the solution I was hoping for really (I suppose I would incur some charge for settling early at the end, presumably 2 months worth of interest based on the initial balance would be the common outcome? since 2 months interest on the remaining balance by that point would be 2 months interest on basically nothing since I am planning on paying it off gradually!).

In some ways it might well be more sensible for me just to start throwing my money full pelt onto my credit cards, but from some rough calculations it might cost me somewhere from £1500-2000 in interest by the time I had cleared them (with yet another 0% balance transfer card with 3k on running out towards the end of this period). All these cards are on about 19.9% AP, compared to 9.9 APR of the loan.

Thanks again
John
p.s. always happy to hear any other comments, or experiences from people who have used Nemo Finance recently!

poppasmurf_bewdley

[QUOTE=jswill100;58603957


I also consider it safe - I have plenty of income and also a buy to let property, so I can easily afford to repayments and intend to pay off a good amount, perhaps an extra 500-1000 PCM for the duration.


John[/QUOTE]

If that's the case, how come you have £11k of credit card debt? And why do you want to borrow £13k when you have £11k of debt you want to consolidate?

jswill100

poppasmurf_bewdley wrote: »

If that's the case, how come you have £11k of credit card debt? And why do you want to borrow £13k when you have £11k of debt you want to consolidate?

I actually have more like 13k when you take into account overdrafts. The reason I am taking it out is because all my credit cards have rates of about 20% APR - as i say I will have no problem paying them off, but rather than taking a couple of years to pay them off at that horrible rate, I thought I would switch over to a nice low rate of loan and save money.

John