How to avoid settlement interest

Nellyw

Hi all, I have a loan which I'm fortunate enough to be in a position of being able to pay off early. However I'm told that if I pay off early in full that I will incur 58 days interest charge.


Is it correct that if I pay almost all the amount off and leave some to be collected by normal DD which in turn will avoid the 58 days interest charge?

sourcrates

This is what citizens advice advise :

Paying a loan off early

If you want to pay off a loan early, under the Consumer Credit Act you should get a rebate of any interest and charges you’ve paid. To do this, you need to write to the lender and ask them to give you an early settlement amount for the loan. This is the total amount you must pay to clear the loan in full, including any rebate.


The lender must tell you the amount if you ask and allow you 28 days from when they received your request to pay the amount off in full. How much interest you have to pay depends on when you took out the loan and how much of it you have already paid off.
You don't have to pay off the loan just because you asked for an early settlement figure. You can carry on with your usual installments instead.


If the lender doesn't answer your letter asking for an early settlement amount or if you think they are charging you too much, get advice from a specialist adviser.
Paying off part of the loan early

If you don’t want to pay off the whole amount owed, you can still pay off part of the loan early. This is called partial early settlement. The amount of rebate you get will be less than paying the loan off in full.


Paying off part of the loan early will affect how you pay the rest of the loan. The credit agreement may be clear about how any partial early payment will affect your remaining loan installments. If it doesn’t say anything about this, you can negotiate with the lender about whether you reduce the regular installments or pay the rest of the amount owed over a shorter period of time.


You must tell the lender verbally or in writing that you intend to pay off part of the loan and make the payment within 28 days. Once you’ve made the payment, ask the lender to confirm how much is left to pay and how it affects the rest of the money owed.

bengalknights

As you state the best way is to leave a small balance and let the dd collect it thus avoiding the interest

System

Nellyw wrote: »

Is it correct that if I pay almost all the amount off and leave some to be collected by normal DD which in turn will avoid the 58 days interest charge?

No. It depends entirely on what is in the contract so you need to check the terms of the loan. In the case of my mortgage for example I can make a repayment of up to 10% without penalty. Anything over that between paying off all but a quid and paying in full and I'll be liable for X month's interest.

Nellyw

ok so the terms of the loan allow me to make unlimited overpayments. There is approx. £3100 left but I have a settlement figure of £2600 which includes a credit on the interest.


I've paid £2400 off so leaves approx. £200 on the settlement figure which is the DD amount.


However if I don't pay the loan off it means there is no return on the interest at that point and I still continue to pay the loan amount which is £500.


So, when that is paid off (£200 a month) I "should" get the interest refund?


Or, I just pay it off and pay the 58 days interest but they cant tell me what that figure actually is.

Nearlyold

All consumer loans since the European Consumer Credit Directive came into force on 1st February 2011 let you make unlimited overpayments (aka partial settlements) as it is now a Statutory requirement to allow them, but this is not the same as allowing you to partially settle with no additional interest charge.

Some lenders impose no additional interest charge on either partial or early settlement.

Some lenders impose an additional interest charge only on full settlement.

Some lenders impose an additional interest charge on partial and full settlements.

The 58 days interest charge is allowable under the Early Settlement Regulations so you need to check your term and conditions to see if your lender charges on partial settlements - if they do, your method of paying most off but leaving a small balance to clear by DD won't work (in terms of avoiding the 58 day interest charge)

jonesMUFCforever

Nellyw wrote: »

So, when that is paid off (£200 a month) I "should" get the interest refund?

.

You will not get any refund as you have not paid it.
You are repaying early to stop the lender charging the inteest - it is this that you are saving.

DebtFreeDuo

When overpaying on my loan they charge the 58 days interest on whatever amount I was overpaying by. I can't see that they would allow you to almost repay the balance without charging the interest as then everyone would take advantage of that loophole. I don't understand where you will be receiving a refund, the settlement amount would exclude the interest that you would have paid over the remaining term of the loan but adds on the 58 days interest.

jonesMUFCforever

DebtFreeDuo wrote: »

When overpaying on my loan they charge the 58 days interest on whatever amount I was overpaying by. I can't see that they would allow you to almost repay the balance without charging the interest as then everyone would take advantage of that loophole. I don't understand where you will be receiving a refund, the settlement amount would exclude the interest that you would have paid over the remaining term of the loan but adds on the 58 days interest.

But most lenders do and you can.
Why would you want to let a loan run its course and pay more?

TrickyDicky101

jonesMUFCforever wrote: »

But most lenders do and you can.
Why would you want to let a loan run its course and pay more?

I think you misunderstood the point DFD was making.

redux

The other day I was discussing a potential loan with one lender, to clarify the terms.

The website terms said there would be am early settlement fee of 2 months interest.

I asked if this applied to any extra payment, as someone might find they had been cautious on the application, and could now send an extra £50 or £100 a month.

What I was actually thinking, but not saying, was there were lower interest rates for larger amounts than I might want, so I might repay a third or half in the first couple of months.

I was told that repayments of up to 90% were possible without being charged an extra settlement fee.

This sounds like the suggestion made by the OP, pay most but not all the balance, and leave the DD to collect the last one or two months, would work for this company.

So it's probably worth asking the question of a couple of companies before choosing.