M&S Bank Loan - Potentially silly question...

Graz279

Having determined from here where I'd get the best rate for a personal loan I applied for one about 18 months ago with the M&S Bank to buy a secondhand caravan. All good, got the money, started paying it back, didn't really think about it after that.

Now I've recently decided that I want to update my car. Got a fair amount towards it but potentially need a few extra thousand. As M&S Bank still seem to be the most competitive thought it would make the most sense to add to my current loan. Now I'd rather take it back out to 5 years again which would probably mean taking out a new loan to pay off the existing loan and add the money for the car.

I've got the statement for the loan in front of me and it seems like all the interest was added at the start of the loan, no further interest has been added as I've made repayments. Do I get some of this refunded if I pay off the loan early? The T&Cs mention something about 1 months interest being charged if you do pay of early. If there's no refund of interest then surely there's no incentive to pay it off early? This would be like one of those nasty flat rate loans that car dealers use otherwise (been caught by one of these once (and only once!)).

Should have asked them when on the phone a while back enquiring about extending the borrowing but hadn't really noticed it then.

Thanks!

[Deleted User]

Interest is charged on a daily basis, so the earlier you pay the loan off, the less you pay. You dont get anything refunded but you just pay less.

They'll charge up to two months interest early settlement on the balance

It's nothing like a flat rate, which is just a different way of showing the rate.

Gaz83

Graz279 wrote: »

Having determined from here where I'd get the best rate for a personal loan I applied for one about 18 months ago with the M&S Bank to buy a secondhand caravan. All good, got the money, started paying it back, didn't really think about it after that.

Now I've recently decided that I want to update my car. Got a fair amount towards it but potentially need a few extra thousand. As M&S Bank still seem to be the most competitive thought it would make the most sense to add to my current loan. Now I'd rather take it back out to 5 years again which would probably mean taking out a new loan to pay off the existing loan and add the money for the car.

I've got the statement for the loan in front of me and it seems like all the interest was added at the start of the loan, no further interest has been added as I've made repayments. Do I get some of this refunded if I pay off the loan early? The T&Cs mention something about 1 months interest being charged if you do pay of early. If there's no refund of interest then surely there's no incentive to pay it off early? This would be like one of those nasty flat rate loans that car dealers use otherwise (been caught by one of these once (and only once!)).

Should have asked them when on the phone a while back enquiring about extending the borrowing but hadn't really noticed it then.

Thanks!

Interest is added daily. If you were to repay it early you'd only have paid interest on the amount you borrowed for the time you'd borrowed it.

The statement will just show the amount outstanding on the assumption that the loan runs for its full term.

Nearlyold

There two ways that lenders can show the "balance" on a loan statement. Your M&S Loan uses method 2

Method 1) To show the current amount outstanding by taking the original amount borrowed, adding the interest accrued to date and deducting the payments made to date. This figure does not take into account future interest yet to be added nor future payments yet to be made. It is thus the true current balance and the lender simply adds up to 2 months interest to arrive at the settlement figure.
or
Method 2) To show the current amount outstanding as the total of the payments yet to be made up to the end date of the loan (which of course includes all the interest yet to be charged). In order to arrive at the settlement figure the lender deducts the interest that will now not be charged because the loan is to be settled early and adds up to 2 months Interest (1 months interest is charged with your loan) to arrive at the settlement figure.

Assuming there is a 1 month interest charge the settlement figure will be higher than the statement "balance" where the lenders uses method 1 and lower where the lender uses method 2. In both cases the Settlement Figure will be identical.