Loan early repayment advice - disagreement over interest due

aceades

Hi,

I have been struggling with this today, i dont know if im right or wrong, im just following what is logical to myself and as a few hundred quid is at stake i thought it best to try and work out where i stand before moving on in any direction.

Here is my pre-written breakdown of the situation , of course any advice so i can put this to bed would be much much appreciated , wasted several hours on the phone to day and got nothing paid off that i wanted to.

Many thanks to anyone who knows how this works and has the time to read any reply .



I'm trying to pay off a loan early with a lender, half way through the term but we have a disagreement on the interest and i need some advice as to who is correct , they are sure i don't understand but to me its completely illogical.

The loan was for 2100

The loan was over 18 months

The total interest forecast for the 18 month loan was 1332.72

Im currently at half way 9 months paid and 9 months due, and wished to pay off the outstanding amount today.

The early settlement figure i was given was 1323.00.

I have so far paid off 1716.36 which is exactly half of the total figure as expected

based on the above this figure is made up from half (1050) of the principle , and half (666.32) of the interest.

As i understand, If my loan is paid off now, then i should not be liable for any interest that is calculated based on borrowing this money for any time longer than that will have expired at the point of pay off,

This is where my confusion starts, according to the account breakdown that they sent through, once my payment is received more money is paid against interest that the principle, the interest paid reduces and principle paid increases until at the end of the 18 months when most of the money is paid to the principle and a little to the interest.

Due to this on my account i have so far paid 914+ interest (not the expected figures above)

Now as i understand it, this loan was for a specific term with a fixed interest rate which would mean i pay the same amount of interest for each month, and so if my loan term halved then the interest should be half, but im told i have to still pay interest that is more like 3/4 of the full 18 months interest, despite ending at 9 months

This seems wrong to me but they are insisting that if they choose to distribute the payments towards the principle and interest in a varied manor this will directly affect how much interest is applicable per month , due to the sliding variation they have used in this case it seems that 914 pounds interest were due for the first half of the 18 month contract, and then just 400 approx for the second 9 months.



As a final example, a comparison between an 18 month loan (paid off at the 9th month) and a 9 month loan for the same amount at the same interest rate, essentially the same loan but with a big difference in interest.

18 months = 3432.72 ( 2100 principle 1332.72 Interest) @ 9 months, loans closed and paid off early , 914 interest has been paid

9 months = 2766.32 (2100 principle 666.32 Interest) @ 9 months, loan term completed = 666.32 interest has been paid

Is this right as it seems to me that it works out very unfairly , my original agreement stated a fixed interest rate and equal payments throughout , please can you explain which way this falls and why ?

personally i feel i have over paid interest, as for 9 months it should be 666.32 as calculated above,
anything excess of that figure is interest calculated and paid on a longer term that 9 months and as such should really be deducted from the remaining owed principle on account closure, if it is closed at 9 months.


I wanted to close this account today, and although leaving it open and accruing more interest is not desirable , i don't want to pay 250 extra interest that it seems to me i am being charged for unnecessarily, i really don't think it matters what they do with the money behind the scenes but this was every person at the company was getting hung up about and trying to justify the cost of my payment with - to me that was irrelevant,

I spoke to 3 people at the company who apart from the last guy didn't seem to follow , the manager did go through in detail but kept moving back to his argument that the payments had been paid against the interest already and that it was all correct and i didn't understand - it was a pleasant call but i could not understand how anything behind the scenes could affect how much interest i pay over all even if i end early.

He seemed to understand the point i made, but due to the company policies they were just given a figure by the computer system that they deemed as definitely correct.

He has said that they will review the calculation, and will call to discuss again in the morning.



Will be surprised if i am right and even more-so if i can change their mind - but i really seems wrong so i want to know how this goes , please chip in if you have any experience here !

emmatthews

What interest rate are you paying, that interest figure is huge?

What are the early settlement terms? You are often charged 28 days (or possibly more) interest when you settle early.

aceades

thanks for the reply em,

, the interest is huge (i don't want to think about it) but it doesn't matter its really the principle of having front heavy interest like that, and more so , effectively paying interest in advance for a period of loan that never actually plays out

So you think this kind of thing isnt governed by a rule of law but more what they spec out in the contract ?

I will review it again but im pretty sure it didn't mention early repayment in contract , im surprised more people dont know this i have been asking all afternoon in other places too and no one is really sure

I guess they can do what the hell they like if they right it into the contract , but there must be a general code of conduct relating to this surely ?

Nearlyold

Sorry aceades but the lender is correct. This is how all loans are calculated, the interest you pay each month is based on how much you owe at that point therefore you pay more interest at the start of the loan than at the end. When you took out the loan they worked out how much interest you were going to pay overall but that interest would not be evenly spread throughout the term of the loan. If you Google "Guardian Loan Calculator" and put your loan figures in you can see exactly how it works. NB emmatthews is correct about the additional 28 days interest and it does seem to be a very high APR.

aceades

Thanks Nearlyold, at least someone has knowledge knowledge of this.

I will read up on this when i get a chance, im not too fussed either way i just wanted to close the account, but i didn't want to pay anything that wasn't owed , once im sure i get get it done and dusted .

Gaz83

aceades wrote: »

thanks for the reply em,

, the interest is huge (i don't want to think about it) but it doesn't matter its really the principle of having front heavy interest like that, and more so , effectively paying interest in advance for a period of loan that never actually plays out

So you think this kind of thing isnt governed by a rule of law but more what they spec out in the contract ?

I will review it again but im pretty sure it didn't mention early repayment in contract , im surprised more people dont know this i have been asking all afternoon in other places too and no one is really sure

I guess they can do what the hell they like if they right it into the contract , but there must be a general code of conduct relating to this surely ?

It does matter, and unless you're prepared to say, no-one can really help you.

What you're thinking is happening isn't happening, though. I can guarantee it.

Post the APR and I'll tell you what your settlement should be, and I bet it will be virtually identical to the lender's - will take me about five minutes to work out.

Gaz83

Actually here you go. If you're paying back £3,432.72 over 18 months for a loan of £2,100 your APR must be roughly 70% with payments of roughly £191.

Here's how it would work: at 70% APR your monthly interest rate would be roughly* 5.8%.

After 1 month you'd owe £2,100 + 5.8% of £2,100, so £2,221.80. You'd then pay £191 so your balance would be £2,030.80.

By the time the next payment comes around you'd add 5.8% onto that, so £2,148.59, then pay £191 so £1,957.59.

You keep increasing the amount you're due by 5.8% and then taking away your payment.

After month three: £2,071.12 - £191 = £1,880.13

After month four: £1,989.17 - £191 = £1,798.18

After month five: £1,902.47 - £191 = £1,711.47

After month six: £1,810.74 - £191 = £1,619.73

After month seven: £1,713.68 - £191 = £1,522.68

After month eight: £1,611.00 - £191 = £1,420

After month nine: £1,502.36 - £191 = £1,311.36

You can see how in the early days of your loan your £191 is made up mostly of interest - in month 1 your £191 is made up of £121 interest, your loan balance decreases only by £70. After month nine your £191 is made up of £82 interest and £109 capital.

This is how loans work.

*It will be slightly different because of rounding, most lenders compound daily, I've done it monthly to simplify things.

ViolaLass

If you owe £100, you pay more interest that month than if you owe £1.

As you pay off more capital, you owe less interest each month, thus your payments are used more to pay off interest at the beginning, and more to pay off capital towards the end.

The bank haven't diddled you at all.

[Deleted User]

aceades wrote: »

So you think this kind of thing isnt governed by a rule of law but more what they spec out in the contract ?

It's governed by maths.

Nearlyold

Deleted_User wrote: »

It's governed by maths.

Very true zx81, of course loan interest calculations are also governed by regulation and the lender is calculating the interest in the way that the regulator requires for early settlements. The OP's mistaken method would mean that those who didn't repay early would be subsidising those that did

aceades

Hi,

Thanks for this, looks like it definitely is how they say then

I have never had a need to question it before , i guess he didn't explain things too well.

I thought it through this morning and the most concise way i can explain it to myself

in the first 9 months i owe (principle) between 2100 and 1050 , in the second half i owe between 1050 - 0 , and interest is paid according to what i owe in principle during that period

It seems simple and logical now , but i just couldn't get my head around it , i guess everyone gets a bit confused now and then and needs a sanity check


Appreciate all the effort gone into above , i will get it all paid off now i'm happy its correct.