Early repayment charge

Humbug2

Hi All,

Hoping for a quick response today.
I took out a £9600 M&S loan over 72 months at 6.9%, a few years ago. It has 19 months to run and my total outstanding debt is £3244, but today I'm in a position to pay it off. I contacted the bank last week and asked for a final settlement amount. The final settlement amount is £3099. This means I will be saving approx. £145 by paying it off early. This seems too low to me, I think I should be saving more.

Here is my reasoning (I could be wrong!):
The interest was added to the loan on day one, so my balance on the loan went from £9600 to £11,681 with interest. That means I'm paying a total of £2081 in interest.

Divide £2081 by 72 months and you get approx. £28.90 per month interest. If I pay the loan off 19 months early, surely that means I'm saving 19 x £28.90 = £549. Subtract two months interest for early repayment fee and I should be saving £491, so why am I only saving £145?

I fully admit I don't really understand this business but any help understanding this would be appreciated.

I will be challenging this on the phone but wanted to know if I'm right or spectacularly wrong before charging in.

Cheers, H

[Deleted User]

You're spectacularly wrong, so hold off on that phone call. You've misunderstood how interest works.

It wasn't added on to your loan day one, It's calculated daily and added monthly. That means that more of your payments go towards interest in the early stages - it's not £28 a month interest. In the first few months, it was around £54.

Two months interest will be charged on your current capital balance as part of early settlement.

foxy-stoat

Your first month interest on £9600 is around £55, a months interest on £3200 is about £12.

Just pay the settlement figure if you can and close the account.

Socajam

Deleted_User wrote: »

You're spectacularly wrong, so hold off on that phone call. You've misunderstood how interest works.

It wasn't added on to your loan day one, It's calculated daily and added monthly. That means that more of your payments go towards interest in the early stages - it's not £28 a month interest. In the first few months, it was around £54.
Two months interest will be charged on your current capital balance as part of early settlement.

That's the same as having a repayment mortgage - more of the payments goes towards the interest in the early stages.