Loan with front-loaded interest

Onwards_and_upwards

My husband and I have a loan with Tesco. It was for £25K and the initial balance to pay was £30K due to interest being added from the outset. The balance is currently at £21K and we’re now in a position to overpay by a few hundred every month. Does anyone know if the interest we have already paid would be refunded, if that makes sense? Many thanks in advance.

[Deleted User]

The interest wasn't front loaded.

You simply pay more in interest at the start, as the capital is higher.

By settling early, you will avoid the future interest (apart from the two months they can add on for early settlement). Nothing gets refunded.

Onwards_and_upwards

Thanks for replying. I really don’t understand then as the loan was for 25k and the statements started at 30k, then 29570, then 29140 and so on. Total interest was 5k and this was added to the loan. Our monthly payments are 428 and this is what our balance goes down by each time. So if we make an overpayment of £300, would more than 300 be taken off the balance to account for interest?

[Deleted User]

The £5k wasn't added to the loan. It's accrued daily. The statements are just in a format which shows the balance if it were to run to term. Request a current balance/early settlement figure to see how much you owe.

If you make an overpayment of £300, £300 comes off the capital.

The interest is covered by your monthly payment.

Onwards_and_upwards

Ah - thank you so much, really helpful explanation!

Craig1981

im doing this with my tesco loan - each overpayment has an interest rebate. My loan was for £12k, balance at start £12,888.00. Overpaid £360 last month, interest rebate £52.00

what you will need to do though is contact tesco and let them know you want to overpay and how they must distribute the funds - 2 ways - either lowering ongoing monthly payments, or keeping monthly payments regular and the same (save more on interest the 2nd way)

you only need to contact them once and they will know your preference...

use their banking app to see the loan details, and you can keep track of your overpayments/interest rebates

Onwards_and_upwards

Thanks for this, this makes sense to me. Wouldn’t have thought about contacting Tesco first, so will definitely do this (and go for option 2!). Thanks again

Cash_Cow

Deleted_User wrote: »

The interest wasn't front loaded.

You simply pay more in interest at the start, as the capital is higher.

By settling early, you will avoid the future interest (apart from the two months they can add on for early settlement). Nothing gets refunded.

Disagree as I just got a Tesco loan and they have immediately added the total amount of interest due up front ('front loaded') and thus increased the balance. I will be paying interest on the interest and it compromises the amount of capital you are paying off at the start of the loan as you are servicing a bigger element of interest. If you let the loan run its full course then it all even out but if say you settle in year 2 of 4 then you will be significantly worse off in my opinion.

I'm going to cancel the loan and take the other option I had as they calculate interest daily which is fairer.

[Deleted User]

Doesn't matter if you disagree or not. It's not front loaded interest. Interest is calculated daily.

They may choose to display the amount outstanding as including isinterest to the end of term, but it's still not front loaded.

Front loading has been outlawed for a decade.

System

Cash_Cow wrote: »

Disagree as I just got a Tesco loan and they have immediately added the total amount of interest due up front ('front loaded') and thus increased the balance. I will be paying interest on the interest

No you won't. I can guarantee that if you phoned them and asked them for a settlement amount it will be much less than what is on your statement, it'll be the outstanding capital plus 56 days interest.

If you think you'll be paying interest on interest do the maths. Divide the total amount owed by the monthly payment and see if the answer matches the amount of months for the term you took out. If it does then you're not paying interest on interest. Still not convinced then go find a loan calculator on the internet. Put in the details for the initial amount you borrowed, the term and interest. You'll find that it shows the total amount repayable over the whole term is exactly the same as the first statement you got showing the added interest and also the monthly payment which will match what you're paying give or take a few pence. This is proof that you won't be paying interest on interest because if you were then the monthly payment would have to be higher to cover that interest paid on the interest wouldn't it?

It scares me that people who don't understand the basics of how loans work happily sign up to £1000s and £10000s of loan agreements.

iolanthe07

It scares me that people who don't understand the basics of how loans work happily sign up to £1000s and £10000s of loan agreements.

This. Many people completely misunderstand the term 'up front interest' because of the illustrative methods used by lenders that assumes a loan going to full term. We really ought to teach this sort of thing at school.