Front Loaded Interest

Rainbow2

What is "Front Loaded Interest"?
I bought furniture in Aug 2012 from a large high street store at a cost of £1490 over a 4 year period. When I had my statement recently it shows 'Front Loaded Interest' of £1280 added in Aug 2012. I pay £77/month. I have payed off £2448 and still have £1248 left to pay (approx 13 months).
Having read some about 'Front Loaded Interest' is this correct and is this the way other banks do it?
Also do I have any justification to challenge it now?

Thanks

Nearlyold

Unfortunately the term "Front Loaded Interest" means different things to different people. The meaning that is unfair to borrowers is where all the interest due over the term of the loan is added to the loan at the start and no rebate is offered on early settlement. Thankfully this type of finance agreement is not legal in the UK for Consumer Credit as all loans have to have the interest calculated on an actuarial basis so that on early settlement you only pay the interest accrued to date plus a maximum penalty of 58 days interest. So you have nothing to worry about on your loan other than the high interest rate you seem to be paying about 40% APR from your Interest figure of £1280 - though your figures don't seem to match up as £77 X 48 is £3696 which would mean paying interest of £2206 over the term of the loan which would be about 74% APR! on original borrowing of £1490. Does your monthly payment include anything else??

Cityhunter_2

Does anyone know if this is on any official website or can be downloaded somewhere?

118118Money are trying to bully me into paying a large early settlement fee because they have "front loaded" the interest and are asking me to prove that what they are doing is wrong.

Nearlyold wrote: »

Unfortunately the term "Front Loaded Interest" means different things to different people. The meaning that is unfair to borrowers is where all the interest due over the term of the loan is added to the loan at the start and no rebate is offered on early settlement. Thankfully this type of finance agreement is not legal in the UK for Consumer Credit as all loans have to have the interest calculated on an actuarial basis so that on early settlement you only pay the interest accrued to date plus a maximum penalty of 58 days interest. So you have nothing to worry about on your loan other than the high interest rate you seem to be paying about 40% APR from your Interest figure of £1280 - though your figures don't seem to match up as £77 X 48 is £3696 which would mean paying interest of £2206 over the term of the loan which would be about 74% APR! on original borrowing of £1490. Does your monthly payment include anything else??

Anthorn

Cityhunter wrote: »

Does anyone know if this is on any official website or can be downloaded somewhere?

118118Money are trying to bully me into paying a large early settlement fee because they have "front loaded" the interest and are asking me to prove that what they are doing is wrong.

Presumably you knew what the repayment terms were at the time you took it out so they cannot be bullying, they just want you to adhere to your end of the bargain.


Front-loading of interest is actually more common that we might think. We find it in personal loans, car finance, mortgages and across the whole finance sectors. The opposite to front-loading and generally regarded as fairer is paying interest every month on the reducing outstanding balance which could get expensive depending on the interest rate and the capital sum.

Nearlyold

Cityhunter wrote: »

Does anyone know if this is on any official website or can be downloaded somewhere?

118118Money are trying to bully me into paying a large early settlement fee because they have "front loaded" the interest and are asking me to prove that what they are doing is wrong.

Could you give us the figures, we cant really help without:-


Need to know
Amount borrowed
Term of Loan
Monthly/Weekly Payment Amount
Interest rate
How many payments you have made so far

Nearlyold

Anthorn wrote: »

Presumably you knew what the repayment terms were at the time you took it out so they cannot be bullying, they just want you to adhere to your end of the bargain.


Front-loading of interest is actually more common that we might think. We find it in personal loans, car finance, mortgages and across the whole finance sectors. The opposite to front-loading and generally regarded as fairer is paying interest every month on the reducing outstanding balance which could get expensive depending on the interest rate and the capital sum.

What you are calling Front Loaded Interest isn't really - You pay monthly interest on the reducing outstanding balance on ALL the loan types you mention so naturally you pay more interest at the start of the loan when you owe more. The term "Front Loaded Interest" gets bandied about far too much. What you describe as the opposite to Front Loaded Interest i.e. interest charged on the reducing balance is the type of loan structure that people complain about as Front Loaded because they mistakenly think that interest should be evenly spread throughout the term of their loan.

Nearlyold

Cityhunter wrote: »

Does anyone know if this is on any official website or can be downloaded somewhere?
.

https://www.gov.uk/search?q=european+consumer+credit+directive

Anthorn

Nearlyold wrote: »

What you are calling Front Loaded Interest isn't really - You pay monthly interest on the reducing outstanding balance on ALL the loan types you mention so naturally you pay more interest at the start of the loan when you owe more. The term "Front Loaded Interest" gets bandied about far too much. What you describe as the opposite to Front Loaded Interest i.e. interest charged on the reducing balance is the type of loan structure that people complain about as Front Loaded because they mistakenly think that interest should be evenly spread throughout the term of their loan.

No.


Why front-loaded interest is disliked is that early repayments go to paying the interest and not the capital. In that case there cannot be a reducing monthly balance. That means that if the loan is repaid early there isn't any interest to be saved because that interest has already been paid and what is cleared is the remaining loan capital.


We might use the analogy of a doorstep lender who adds the interest to the capital before the first payment is made and the interest plus the capital is the total amount to be repaid as if the interest plus the capital is wholly the capital.

glentoran99

Cityhunter wrote: »

Does anyone know if this is on any official website or can be downloaded somewhere?

118118Money are trying to bully me into paying a large early settlement fee because they have "front loaded" the interest and are asking me to prove that what they are doing is wrong.

that in itself isn't wrong a lot of loans would have early settlement fees added if you want to settle early

CLAPTON

Anthorn wrote: »

No.


Why front-loaded interest is disliked is that early repayments go to paying the interest and not the capital. In that case there cannot be a reducing monthly balance. That means that if the loan is repaid early there isn't any interest to be saved because that interest has already been paid and what is cleared is the remaining loan capital.


We might use the analogy of a doorstep lender who adds the interest to the capital before the first payment is made and the interest plus the capital is the total amount to be repaid as if the interest plus the capital is wholly the capital.

this is simply incorrect

the law does provide that some interest can be charged for early repayment of a loan but only a month or so

Nearlyold

Anthorn wrote: »

No.


Why front-loaded interest is disliked is that early repayments go to paying the interest and not the capital. In that case there cannot be a reducing monthly balance. That means that if the loan is repaid early there isn't any interest to be saved because that interest has already been paid and what is cleared is the remaining loan capital.


We might use the analogy of a doorstep lender who adds the interest to the capital before the first payment is made and the interest plus the capital is the total amount to be repaid as if the interest plus the capital is wholly the capital.

What you describe is an accurate description of Front Loaded Interest however it simply illustrates my point of how the term Front Loaded Interest is bandied about too much because the loan structure you describe is not available to consumers in the UK as its prohibited under Consumer Credit legislation.