Clarity on over payments

1stTimer

Hi all

I'm on a mission to clear all my debt so I can start saving and being a bit more frugal :money:
I'm doing ok at the moment and finally out of £21,000 have only £1000 left on a CC and a Barclays £10000 loan, the loan was taken out in Aug for 3yrs at £341 a month (8% apr) but after my card is paid off I'd really like to whack the extra cash onto my loan.

Just read the T&Cs and it says the following:
you may make additional early repayments to your loan but you must notify us prior to doing so. For each partial early repayment made we will charge you a fee equal to 30 days interest on the amount being repaid. This fee will be taken from the additional early repayment you have made. This loan agreement will continue and if all remaining loan payments are made as due then the loan term may be reduced as a result of the partial early repayment

Does this mean that each payment I make will be charged 30days interest on top?
What's the best way to tackle this?

Moneymash

For every over payment you want to make, instead of putting it towards the loan and losing a percentage in interest put it in to a savings account. Pay off the loan when your savings match the outstanding balance.

gb12345

Moneymash wrote: »

For every over payment you want to make, instead of putting it towards the loan and losing a percentage in interest put it in to a savings account. Pay off the loan when your savings match the outstanding balance.

If they do that they will end up paying more interest than if they just took the hit of the 30 days interest.

Moneymash

If the OP makes over payments they are paying interest twice, once on the total outstanding balance of the loan and then again when they make an over payment.

Even though the over payment reduces the balance of the loan, this would be minus the interest paid.

gb12345

If they make an overpayment of say £100 then they will pay 30 days interest on that overpayment. They will then pay no further interest on the money they have overpaid.

If they stick the £100 in a savings account, they will get a small amount of interest on that, but they will be paying 8% pa on the £100 (less 30 days interest) that they didn't repay until the end of the loan.

Moneymash

gb12345 wrote: »

If they make an overpayment of say £100 then they will pay 30 days interest on that overpayment.
Why should they want to pay interest twice on this £100?

They will then pay no further interest on the money they have overpaid. Yes, as obviously that's the point of the over payment.

If they stick the £100 in a savings account, they will get a small amount of interest on that, but they will be paying 8% pa on the £100 (less 30 days interest) that they didn't repay until the end of the loan.

They wouldn't be paying 8% it would be 8% minus the savings interest.

Think of it this way the bank is charging you a fee to make an over payment ( on an amount you have already paid interest on), not only do they get this fee, you are not able to reduce your loan by £100 but only by £100 minus the fee. The bank wins twice.

1stTimer

Oh dear, now I really don't know what to do!

Thanks for your input though, do really appreciate it

imoneyop

Moneymash wrote: »

They wouldn't be paying 8% it would be 8% minus the savings interest.

Think of it this way the bank is charging you a fee to make an over payment ( on an amount you have already paid interest on), not only do they get this fee, you are not able to reduce your loan by £100 but only by £100 minus the fee. The bank wins twice.

I don't think your logic works to be honest.

If the person has a year left to pay on their loan.

They make an over payment of £100 as the previous poster says. They would pay 30 days interest on this. That would be about 65p interest. They would obviously have to pay interest for the remainder of the term on the 65p "fee", which would be about 4p

If they stick the money in a savings account at lets say 2%, they would get £2 interest, but they would pay a years interest (£8) on the £100 (less 65p) that they didn't pay off their loan - so that has cost them £6 as opposed to £0.69.

Obviously, you would have to allow for the future repayments reducing the £100 outstanding slightly, but I still don't think it would outweight the difference in overpaying.

The longer the term remaining on the loan, the worse it gets.

redpete

Moneymash wrote: »

They wouldn't be paying 8% it would be 8% minus the savings interest.

Think of it this way the bank is charging you a fee to make an over payment ( on an amount you have already paid interest on), not only do they get this fee, you are not able to reduce your loan by £100 but only by £100 minus the fee. The bank wins twice.

Let's say the OP could make an overpayment of £100, the "fee" of 30 days' interest would be approx 66p. After 28 months (the remaining period of the loan) this overpayment would save £19.64 in interest.

The same £100 put into a savings account at 3% would earn £7.24 in interest.

So if the OP put the £100 as an early overpayment they would be approx. £12.40 better off at the end of the loan period even accounting for the fee.

The OP wins once.

1stTimer

Ok so think I'm def going to overpay, will call them Monday and get the account details etc.

I'm going to up the monthly payment to £500 hopefully so that's an overpayment of £159 a month and the remaining £150 I have left will go into savings so i can have the best of both worlds and see some savings aswell:T

Thanks all really appreciate it!