Front Load Interest

hardyp74

Hi there, after some advice. I have a unsecured personal loan with M&S, £15000 over 5 years, £294.82 month, 6.9% apr. It was for a car which I have sold so wanted to clear the loan. I've paid in for 2 years so was expecting the settlement figure to be around £9000 + a month or two interest penalty (£15000/60*36) but have been quoted £10k as they said the interest was front loading. !!!!!!. Every loan I've had in the past I've just paid same capital payment with same set interest amount every month. I moaned that this was not explained when taking the loan out and I wouldn't have taken the loan with them if I had known. They just told me to write into the complaints department. Even looking on their website now there is no mention of this, probably buried in the T&Cs. Is this normal/allowed as I've never had this issue when settling loans before? Is it worth complaining?

Just noticed on my first anual statement at the start of the loan there is a Interest on Principal of £2689.20. That means most of the first years payments would of literally just been paying them interest. Surely thats not right.

Thanks in advance...

arbroath_lass

This sounds normal to me. You actually pay more interest and less capital at the start of the loan as you owe more money. Take a look at this calculator to see how your payments are actually broken down.

http://www.thecalculatorsite.com/finance/calculators/loancalculator.php#results

SeanG79

hardyp74 wrote: »

Hi there, after some advice. I have a unsecured personal loan with M&S, £15000 over 5 years, £294.82 month, 6.9% apr. It was for a car which I have sold so wanted to clear the loan. I've paid in for 2 years so was expecting the settlement figure to be around £9000 + a month or two interest penalty (£15000/60*36) but have been quoted £10k as they said the interest was front loading. !!!!!!. Every loan I've had in the past I've just paid same capital payment with same set interest amount every month. I moaned that this was not explained when taking the loan out and I wouldn't have taken the loan with them if I had known. They just told me to write into the complaints department. Even looking on their website now there is no mention of this, probably buried in the T&Cs. Is this normal/allowed as I've never had this issue when settling loans before? Is it worth complaining?

Just noticed on my first anual statement at the start of the loan there is a Interest on Principal of £2689.20. That means most of the first years payments would of literally just been paying them interest. Surely thats not right.

Thanks in advance...

Your interest hasn't been front loaded...you are calculating the settlement figure based on £15,000 with no interest...@6.9 APR there was interest charged every month on the Capital or would you expect the lender not to charge any interest for the 2 years you've had use of their funds?

SeanG79

More of your payments initially cover interest, as there is a larger capital amount outstanding, but it still doesn't make the loan front loaded.

hardyp74

It was the M&S advisor who told me it was front loaded. strange as previous loans I've had the outstanding payment was roughly what I expected. I've assumed same capital and interest amount is being paid every month over the term of the loan, guess this is not always the case but how do you know this before hand.

hardyp74

SeanG79 wrote: »

Your interest hasn't been front loaded...you are calculating the settlement figure based on £15,000 with no interest...@6.9 APR there was interest charged every month on the Capital or would you expect the lender not to charge any interest for the 2 years you've had use of their funds?

Yes I did it like this as I assumed the capital and interest amounts are the same every month as explained in last post so didn't include the interest. Just assumed it would be 3/5ths of the capital + 2 months interest penalty.

This has worked for me on multiple previous personal loans. Always get 5 year loans and pay them off after 2 years when I get rid of the car. Works out cheaper than leasing a car assuming you get the right kind of depreciating car.

Guess I've just been lucky with the loans in the past or things have changed.

[Deleted User]

It would be impossible to be any other way. They split the payments equally, as otherwise you couldn't afford it (with the huge early payments).

But when you owe £15k in the first month, and £250 in the last month, you have to be paying more interest at the start. The equal payments just makes some people think they're paying the same capital and interest each month.

arbroath_lass

hardyp74 wrote: »

I've assumed same capital and interest amount is being paid every month over the term of the loan, guess this is not always the case but how do you know this before hand.

I've never known this to be the case. Not saying it doesn't happen but it is definitely not the norm.

pheonixrising21

arbroath_lass wrote: »

This sounds normal to me. You actually pay more interest and less capital at the start of the loan as you owe more money. Take a look at this calculator to see how your payments are actually broken down.

http://www.thecalculatorsite.com/finance/calculators/loancalculator.php#results

That's what I was thinking. I used a different site - http://money.guardian.co.uk/calculator/form/0,,603119,00.html but it works out exactly the same.

After 24 months, the amount owing is £9850. Add a couple of months interest to this (£approx £56 per month) and you get almost £9960-ish.

Think of it this way, over 2 years at £296.31 a month, you will have paid £7114. Add to that the £9960-ish settlement and you get approx £17,070. This compares to the £17,778 if you make all the payments, so you will save £700 in interest.

The £2689.20 added on at the start is the total interest you will pay over the term of the loan. Its just the way they show it. They show the full total repayable, but then take your full monthly payment off the amount owed.

Your settlement figure will include an "interest rebate" of roughly the £700 shown above.

Other companies don't add the interest at the start, but then they don't take off the full monthly payment from the amount owed, just the capital repayment element (which will get bigger each month). Both work out the same way.