reduced term or recalculate

stunews

Hi, apologies if this has already been asked...

I've made some small overpayments recently and wanted to check with Barclays that I understood what was happening. I don't!

Firstly they told me they calculate interest daily, so I should benefit from the overpayment straight away. It was the next bit I didn't understand.

I thought that an overpayment would reduce the monthly payment amount. But it turns out it doesn't.

If I make an overpayment of over 3x the usual monthly payment, they recalculate the monthly payment. Anything less, and it reduces the term.

I asked to see some numbers. If I pay 1k off a 100k loan, I'm only paying interest on the 99k. I then asked, if my monthly payment remains the same, and I'm paying less interest, then more of my payment should go to paying off the balance. I was told no, this does not happen, it reduces the term. This is where I got lost. At this point the staff member said they needed to go to a meeting, so I left none the wiser.

Can anyone explain this to me?? I'm none the wiser as to whether I'm paying less interest, and where the difference goes if not to pay off the balance?

Should I save up to hit the 3x payment amount so it's recalculated? (I know to be careful not to hit the overpayments limit)

I'd be much appreciative of some help..

woodfired

Hi

The way I understand (and I hope i'm right!) is that yes, overpaying does reduce the interest paid each month so a larger portion of your regular payment is available to reduce the capital owed. This in itself will reduce the term because the capital will reduce faster than it normally would without overpaying. I'd say you're right that it does reduce the balance and, therefore, the term the loan is paid over.

Clear as mud?

WF.x