loan closure - confused

haribo007

Hi,

I have come into some money and wish to pay off a loan which I have with the TSB. On their website they can give you a quote for closing which is as follows:

Current balance £5,104.40
Here is your early settlement quote. This quote is valid until 26 Aug 2015. After this date, if you haven't settled your loan, you'll have to request a new quote.
Amount outstanding (including interest due to the end of your loan) £5920.36
Early settlement rebate £474.39
Total amount to settle your loan (amount outstanding less early settlement rebate) £5445.97
Your early settlement rebate has been calculated in line with the Consumer Credit (Early Settlement) Regulation 2004, and is shown as a reduction in the interest due and taking this rebate into account we, in effect, charge up to 58 days’ interest.

So I was all set to pay £5445.97 to close my loan when I saw they had an additional payments page, including calculator, so I thought I’d check that. I put in that I wanted to pay an additional payment of £5,104.00, which meant I would still owe them 0.40p. The results of the calculator were:

Take a look at the effect on the interest you’ll pay and the number of repayments you’ll have outstanding if you make an additional payment on your loan.
Amount: £5,104.00
New balance:£0.40
Repayments remaining:0 months
Repayments reduced by:22 months
Interest you’ll save:£551.00

I’m obviously missing something here, why is it cheaper to pay 99.99999% of my loan off as an additional payment than it is to ask for a closure? Would there be a hidden fee if I was to make the additional payment? Which is the best way to clear my loan?

Thanks

[Deleted User]

You'd be avoiding the two months interest they're entitled to charge on an early settlement.

haribo007

So I'm best to pay a huge additional payment? What will happen with the balance of my loan? I normally pay £200 a month but in this case would have 40p left, will they adjust my payments? And won't they still be able to charge me two months interest as I'll be effectively settling it early?.... Still confused :-)

haribo007

Bump...............

DevCoder

haribo007 wrote: »

So I'm best to pay a huge additional payment? What will happen with the balance of my loan? I normally pay £200 a month but in this case would have 40p left, will they adjust my payments? And won't they still be able to charge me two months interest as I'll be effectively settling it early?.... Still confused :-)

You will have 40p left to pay, you would pay this as a last payment in the next month (when you'd normally pay £200). If you have a DD setup then they should adjust the amount taken to 40p.

You'll get charged 2 months interest on the 40p, as opposed to 2 months interest on the £5K. As 2 months on 40p will be 0.0001p (event at 10% interest rate) then there would be no interest penalty to pay.

Xbigman

This is a common technique for clearing loans cheaply but I always advise that you should pay off a large lump sum but leave a full months payment plus £1 remaining. Although the terms and conditions of extra payments are usually straight forward cutting it too fine can cause problems and for the sake of a few £'s interest its not worth it.



Darren

haribo007

Thanks. I think I'll follow your advice and give it a go. Hopefully nothing will go wrong and bite me on the bum!