Loan overpayment query

lollysmom

Hi,
I have 4 years left on a 7 year 15k loan 8.9%apr. I have been overypaying in odd amounts since the loan was took out and now am in a better financial position I am aiming to try and overpay more each month.
My question is if I overpay £130 it knocks one months payment off and saves say £69 interest (online it tells me how much i save etc) why does it only knock the £130 off the total amount of the loan, not the £196 total?
Also, if I can repay enough to knock one extra payment off each month so 4 years becomes 2 is that how it works or would it knock more than that off due to the interest saved but not knocked off the total amount? does that make sense?
thank you x

[Deleted User]

lollysmom wrote: »

does that make sense?

Not really.

Any overpayment you make will come off the capital. You'll then pay less interest as it is charged on the daily balance.

lollysmom

Thank you, that makes sense, so really the more i can pay off the better x

[Deleted User]

Correct - the more and the earlier.

Gaz83

Lightway12 wrote: »

Thanks for sharing this!

Spammer building post count

ELLE123_2

Hi I came here because I have recently made an overpayment to my First Direct personal loan and it doesn't seem to have been to my benefit at all. Could anyone explain what has gone wrong here as it doesn't match the advice given to the OP that the more paid off the better. Any help greatly appreciated!

Basic position is: £15k loan over 5 years at 3.60%, paying £273.42 per month. So total repayment = £16,405. So far so good...

I recently repaid £4.5k as an overpayment, after paying the regular instalments for 10 months. The First Direct staff member told me my new term would be another 33 payments at the normal rate, meaning I have shortened the term but am still paying back the same overall interest figure.

I have just received my first annual statement and it does indeed show the opening balance of the loan at £16,404 (i.e. the capital I took out plus all the interest), and all subsequent payments have been coming off this figure.

Is this correct? If so, I think it's a bit crafty of First Direct to advertise that they allow unlimited overpayments without fee if there isn't actually any benefit to the customer!

Sorry for the excessive detail, and well done if you have made it this far! Any comments appreciated.

lollysmom

That was what was confusing me but I understand it now, the overpayments we make come off the overall balance so if you had a 15k loan and overpaid 4.5k you would have 10.5k left to pay so that reduces your remaining months of payments, interest is added at the start of the loan but with mine I also get interested added each month so i can pay the monthly payment of £250 but then approx £90 is added so only paying £160 off the capital so for example say its £3 per day its charging interest....so its finally clicked with the advice i had here that each overpayment I make to pay it off earlier is saving me about £3 a day...which over time really adds up so it is saving us money in the long run. My loan is on my internet banking though so I can see daily what is happening with it and I keep a book with the amount ive overpaid and when - so far Ive overpaid £1200 and reduced the monthly payments by 7 so going on interest daily rate of £3 ive saved around £630... doesnt sound much but its better than nothing, hope that helps x