Car Loan Question

UnitedFan

I took out a loan to purchase my new car in October of last year with payments that I could comfortable afford.

I have now got a new job with extra disposable income at the end of each month. I am unsure whether to make overpayments on the loan to reduce either the term of the loan or the monthly payments amounts.

However, the interest on the loan was applied at the start of the loan so any overpayments would not reduce the interest that I am paying on it (my understanding from the loan paperwork, might be wrong).

So am I better making overpayments to clear the loan quicker or saving the money to use on other items. Any help would be great.

Pixie5740

Are you absolutely positive that the interest was front loaded and it's not a case of the total amount repayable being divided over however many months the term is to give you the same repayment amount each month?

Debtslayer

UnitedFan wrote: »

I took out a loan to purchase my new car in October of last year with payments that I could comfortable afford.

I have now got a new job with extra disposable income at the end of each month. I am unsure whether to make overpayments on the loan to reduce either the term of the loan or the monthly payments amounts.

However, the interest on the loan was applied at the start of the loan so any overpayments would not reduce the interest that I am paying on it (my understanding from the loan paperwork, might be wrong).

So am I better making overpayments to clear the loan quicker or saving the money to use on other items. Any help would be great.

Check your loan paperwork to see if you are allowed to make overpayments. If you are the normal monthly payment doesn't usually change; the payment normally stays the same and term reduces.
But you need to check what your loan states
Also do you have any money in savings / emergency fund?
If not then I would build up an emergency fund in case of the unexpected

andyfromotley

Could i just start by saying that i am not certain about this but i dont think companies are allowed to front load interest in the way you describe. You definitely need to check this out. Perhaps give mational debtline a bell, they may have the answer.

UnitedFan

Debtslayer wrote: »

Check your loan paperwork to see if you are allowed to make overpayments. If you are the normal monthly payment doesn't usually change; the payment normally stays the same and term reduces.
But you need to check what your loan states
Also do you have any money in savings / emergency fund?
If not then I would build up an emergency fund in case of the unexpected

I am allowed to make overpayments as long as I inform the loan company prior to making a payment otherwise it is there decision to whether or not they accept it.

My loan states that it will either reduce the term or payment based on their decision.

I currently have an emergency fund of £500 which I top up by £100 a month at the moment in addition to saving for the likes of christmas/birthdays/car service etc.

With regards to the interest for overpayment/early completion of loan the contract states "on making any repayment you will have a right to a rebate under the CCA which we will calculate in accordance with the CCA (and we can then claim additional interest as permitted by CCA)" it was this clause that confused me over whether or not the interest was front loaded or not.

Thank you all for your help and replies

Playing_with_Fire_2

The CCA means that you may pay interest for an extra 60 days on the over payment. For long term loans this almost always works out better than not making over payments.

If they reduce the payment, you might be able to set up the direct debit to take the amount that you want. You may also be able to send a monthly payment after the DD so that you are paying what you want to and saving the most interest.