Repaying a loan early

imapoorstudent

Can somebody please advise on repaying a loan early?

I want to take out a loan for £5k to buy a used car. I want to pay it off in two years but cannot afford the regular monthly repayments this year.

So, is it possible to take a loan out over a longer term with a view to paying it off after two years? If I spread it over, say, 5 years, I could afford the lower monthly repayments this year and then make lump sum payments as and when I get them (e.g. reclaimed bank charges!).

Some banks say I will pay a month's interest for settling early, but how much does this equate to in actual terms?

CLAPTON

well if your loan outstanding is say 4000 and your interest rate is say 7%
the 1 months interest will be 4000x7%/12 = £24


obviously you need to substitute the real figures to work it out properly but it gives you an idea.

also remember that early settlement is not the same as paying lump sums(overpaying) and different rules will apply.

betti911

I've got a Royal Bank of Scotland Graduate Loan for my car. The minimum payment is £89 per month for 5 yrs but I pay it off at just over double that. There's no early repayment charge. You could always try your bank to see if you can get a similar deal or try the loans section of this website.

Tomarse_2

betti911 wrote: »

I've got a Royal Bank of Scotland Graduate Loan for my car. The minimum payment is £89 per month for 5 yrs but I pay it off at just over double that. There's no early repayment charge. You could always try your bank to see if you can get a similar deal or try the loans section of this website.

I'd double check all the figures closely if I were you.

I seem to remember (ex RBS group PPI employee) that RBS group use what they call the "rule of 81" for stinging you for admin charges when making early settlements. It wouldn't suprise me however if the they couldn't work out how to apply this when repayments are increased rather than paying a lump sum later on in the course of the loan. Another legal grey area if you ask me...

betti911

I checked this at the time after a bad experience with Black Horse. The lady who sold me the loan checked with the head office who said that I could overpay the graduate loan at no extra cost. Was worried about that when I took out the loan.

CLAPTON

betti911 wrote: »

I checked this at the time after a bad experience with Black Horse. The lady who sold me the loan checked with the head office who said that I could overpay the graduate loan at no extra cost. Was worried about that when I took out the loan.

i'm not sure what you mean about 'no extra cost'
the whole point of overpaying is that the cost (i.e. interest) is actually reduced.. there being absolutely no question of paying more because you pay early.
so the issue is how much will the interest be reduced because you are overpaying.

MarkyMarkD

Tomarse wrote: »

I seem to remember (ex RBS group PPI employee) that RBS group use what they call the "rule of 81" for stinging you for admin charges when making early settlements. It wouldn't suprise me however if the they couldn't work out how to apply this when repayments are increased rather than paying a lump sum later on in the course of the loan. Another legal grey area if you ask me...

That would have been "rule of 78". It's now been outlawed for new loans from any lender. It wasn't a way of "stinging you", it was just an easy way of working out interest in the days before computers. As a by-product it penalised early settlement but that wasn't its original intent.

Tomarse_2

MarkyMarkD wrote: »

That would have been "rule of 78". It's now been outlawed for new loans from any lender. It wasn't a way of "stinging you", it was just an easy way of working out interest in the days before computers. As a by-product it penalised early settlement but that wasn't its original intent.

Thanks for clarifying that.

By the way, it was only a couple of years ago I worked there and learnt about this so I'm not sure it's completely outlawed. Although, saying that, it wouldn't suprise me if it was just another incompetancy of the company I worked for. :rolleyes:

betti911

CLAPTON wrote: »

i'm not sure what you mean about 'no extra cost'
the whole point of overpaying is that the cost (i.e. interest) is actually reduced.. there being absolutely no question of paying more because you pay early.
so the issue is how much will the interest be reduced because you are overpaying.

Meant that rule of 78 was not imposed and no early repayment charges.

nomoneytoday

Why not go for a PCP type finance deal instead?

Lower payments for 2/3 years, and then your savings can pay the balloon (assuming it has a low APR etc)