When paying off a loan early, do you pay the remaining principal or remaining principal + interest?

Aethelwulf

I'm planning on getting a loan of £3,000 from RBS. Fixed APR is 19.9%. And I was looking at over 5 years, but the duration is something I'm trying to work out. This isn't great as I understand it, but this will be my first piece of credit history, so my score is simply average. And it's a penalty I'm willing to incur to get things on track. At first I was calculating things wrong.. The 'total amount repayable' I received on £3,000 over 5 years was £4,599. So I calculated the amount of interest as £1,599 / 60 months = £26.65/pm. But this is wrong right.. It's actually £3000 x 0.199 = £49.75/pm. On top of that, you pay more interest earlier on in to the loan and more principal towards the end.. I imagaine this is to dissuade early repayment. This makes sense in hindsight. I guess it was just naivety thinking loans are so straightforward.

So getting to the point, my original plan was to pay monthly for 12 months, and then pay the remainder after that period along with the 58 day interest fee.. What I thought was £53.3, but is actually £99.5. By doing this, I thought I'd be saving A LOT of money on interest, but they've obviously set it up in a way where you can't do that? I don't know, it's confusing me. If I decide to pay my loan off after a year, what am I looking at paying? Am I paying the remaining £2,600 of the actual amount I borrowed + 58 days interest.. Or am I paying the remaining 'total amount repayable' + the 58 day fee?

Any help would be appretiated, my head feels like it's going to pop!

DrEskimo

Yes the average interest payable will be £26.65 over the 5years, but as you say, the proportion of your monthly payment going towards capital and interest is not fixed, it changes over the term. 

The reason the interest is higher at the beginning is not to dissuade people to settle early, it's just a mathematical fact. The balance is higher. As the balance decreases over the term, so does the interest.

The settlement would be based on the amount of capital left + 58 days interest. You would not pay the full amount of interest, only interest on the time you had the agreement.

If you are planning on paying back after just 12months, why not look at 0% credit cards? Borrowing money at 19.9% is extremely high....

Aethelwulf

DrEskimo said:

Yes the average interest payable will be £26.65 over the 5years, but as you say, the proportion of your monthly payment going towards capital and interest is not fixed, it changes over the term. 

The reason the interest is higher at the beginning is not to dissuade people to settle early, it's just a mathematical fact. The balance is higher. As the balance decreases over the term, so does the interest.

The settlement would be based on the amount of capital left + 58 days interest. You would not pay the full amount of interest, only interest on the time you had the agreement.

If you are planning on paying back after just 12months, why not look at 0% credit cards? Borrowing money at 19.9% is extremely high....

19.9% is honestly the lowest I can get from anything. It's the best of a bad situation. And compared to other rates I've seen, almost seems generous. For example a loan from Amigo had an APR of 49.9%. Crazy. I'll at least look into credit cards, I've looked at a couple of balance transfer ones for example but don't think I'm eligible.

I understand about the interest more clearly now. Thanks for that! You essentially pay interest as you go. The interest averaged out is still £26.65, but starts higher and decreases as the capital decreases. Makes sense. So my original thought process of the earlier I pay off the loan, the less I actually pay my bank still holds true?

DrEskimo

Aethelwulf said:

DrEskimo said:

Yes the average interest payable will be £26.65 over the 5years, but as you say, the proportion of your monthly payment going towards capital and interest is not fixed, it changes over the term. 

The reason the interest is higher at the beginning is not to dissuade people to settle early, it's just a mathematical fact. The balance is higher. As the balance decreases over the term, so does the interest.

The settlement would be based on the amount of capital left + 58 days interest. You would not pay the full amount of interest, only interest on the time you had the agreement.

If you are planning on paying back after just 12months, why not look at 0% credit cards? Borrowing money at 19.9% is extremely high....

19.9% is honestly the lowest I can get from anything. It's the best of a bad situation. And compared to other rates I've seen, almost seems generous. For example a loan from Amigo had an APR of 49.9%. Crazy. I'll at least look into credit cards, I've looked at a couple of balance transfer ones for example but don't think I'm eligible.

I understand about the interest more clearly now. Thanks for that! You essentially pay interest as you go. The interest averaged out is still £26.65, but starts higher and decreases as the capital decreases. Makes sense. So my original thought process of the earlier I pay off the loan, the less I actually pay my bank still holds true?

Absolutely! The earlier you repay, the cheaper it gets. 

Appreciate you were not here to seek financial advice on how best to borrow money or improve your financial situation, however thought I would offer some alternatives to help you save money. Always worth running through your options before committing to such a high cost loan.

Doneby55

Others have answered your Q on interest, but just wanted to add - if you need the cash for something you can't buy on a credit card, is it worth a look at a money transfer card from the likes of MBNA? Often have 0% promotional rates (with a fee) but then you've got flexibility to overpay (but you MUST pay minimums on time to keep the 0%.
Apologies if you've already tried this, but I see MBNA do an online eligibility checker which is a soft search so doesn't affect credit record. Surely worth a go before a 20% loan...

Aethelwulf

Doneby55 said:

Others have answered your Q on interest, but just wanted to add - if you need the cash for something you can't buy on a credit card, is it worth a look at a money transfer card from the likes of MBNA? Often have 0% promotional rates (with a fee) but then you've got flexibility to overpay (but you MUST pay minimums on time to keep the 0%.
Apologies if you've already tried this, but I see MBNA do an online eligibility checker which is a soft search so doesn't affect credit record. Surely worth a go before a 20% loan...

I'd love a balance transfer card! But I'm not eligible for one. At least not for the amount I need. The purpose of me lending money is to pay off my student overdraft, pay other random debts and just all round get my finances organised and streamlined. It's just a shame I have to pay such a high interest rate to do so. But I'm trying to not look at in this way.. The amount I need to borrow and my situation is quite mild comapred to some, so I'm trying to be optimistic about it.

DrEskimo

Aethelwulf said:

Doneby55 said:

Others have answered your Q on interest, but just wanted to add - if you need the cash for something you can't buy on a credit card, is it worth a look at a money transfer card from the likes of MBNA? Often have 0% promotional rates (with a fee) but then you've got flexibility to overpay (but you MUST pay minimums on time to keep the 0%.
Apologies if you've already tried this, but I see MBNA do an online eligibility checker which is a soft search so doesn't affect credit record. Surely worth a go before a 20% loan...

I'd love a balance transfer card! But I'm not eligible for one. At least not for the amount I need. The purpose of me lending money is to pay off my student overdraft, pay other random debts and just all round get my finances organised and streamlined. It's just a shame I have to pay such a high interest rate to do so. But I'm trying to not look at in this way.. The amount I need to borrow and my situation is quite mild comapred to some, so I'm trying to be optimistic about it.

Debt consolidation rarely works. Shifting debt doesn't solve the issue, it merely moves it around. The danger is you use the loan to free up those credit streams you are used to using and then you continue to use them again. If you do, you will be in the same situation as you are now, but with a 19.9% loan as well. If you look at the debt wannabe forums, you will see so many people saying how they wish they didn't consolidate their debt, as it simply prolonged the situation and didn't address the actual issue. In fact, in the majority of cases, it made it worse.

The answer to getting your finances in order is to track your spending, work out where you are overspending and make cuts, work out a detailed budget that allows you to free surplus funds and pay down the debts as quick as possible.

I would check out Dave Ramsey's baby steps as a good plan to paying off your debt and getting ahead financially. It's US centric, but you can apply the same principles:

https://www.daveramsey.com/dave-ramsey-7-baby-steps

Doneby55

Aethelwulf said:

Doneby55 said:

Others have answered your Q on interest, but just wanted to add - if you need the cash for something you can't buy on a credit card, is it worth a look at a money transfer card from the likes of MBNA? Often have 0% promotional rates (with a fee) but then you've got flexibility to overpay (but you MUST pay minimums on time to keep the 0%.
Apologies if you've already tried this, but I see MBNA do an online eligibility checker which is a soft search so doesn't affect credit record. Surely worth a go before a 20% loan...

I'd love a balance transfer card! But I'm not eligible for one. At least not for the amount I need. The purpose of me lending money is to pay off my student overdraft, pay other random debts and just all round get my finances organised and streamlined. It's just a shame I have to pay such a high interest rate to do so. But I'm trying to not look at in this way.. The amount I need to borrow and my situation is quite mild comapred to some, so I'm trying to be optimistic about it.

Fair enough - I wasn't clear from your first post you'd checked money transfer options, but sounds like you have. Presumably the overdraft will have a higher rate (or will do soon with the changes coming in), so agree - it's not a huge amount, so be optimistic and overpay as rapidly as you can to save interest. Good luck!

redux

You can find online loan calculators which detail the relative amounts of principal and interest as they change through the loan period, see the marginal extra cost of different rates, or experiment with what happens if you pay back a lump sum or alter monthly payments.

I'd suggest one at the Guardian, not for political reasons, I just like the straightforward format.

Terry_Towelling

What is the interest rate on your student overdraft? - is it free?  What about these other 'random' debts you mention in passing? - what rates are you paying on these and what sort of debts are they?

If the overdraft is free, you'd be better off simply aiming to reduce it monthly by the same amount as you would be paying towards a loan.  If you think that would be difficult, then consider how you'd afford to make loan repayments.

Aethelwulf

DrEskimo said:

Aethelwulf said:

Doneby55 said:

Others have answered your Q on interest, but just wanted to add - if you need the cash for something you can't buy on a credit card, is it worth a look at a money transfer card from the likes of MBNA? Often have 0% promotional rates (with a fee) but then you've got flexibility to overpay (but you MUST pay minimums on time to keep the 0%.
Apologies if you've already tried this, but I see MBNA do an online eligibility checker which is a soft search so doesn't affect credit record. Surely worth a go before a 20% loan...

I'd love a balance transfer card! But I'm not eligible for one. At least not for the amount I need. The purpose of me lending money is to pay off my student overdraft, pay other random debts and just all round get my finances organised and streamlined. It's just a shame I have to pay such a high interest rate to do so. But I'm trying to not look at in this way.. The amount I need to borrow and my situation is quite mild comapred to some, so I'm trying to be optimistic about it.

Debt consolidation rarely works. Shifting debt doesn't solve the issue, it merely moves it around. The danger is you use the loan to free up those credit streams you are used to using and then you continue to use them again. If you do, you will be in the same situation as you are now, but with a 19.9% loan as well. If you look at the debt wannabe forums, you will see so many people saying how they wish they didn't consolidate their debt, as it simply prolonged the situation and didn't address the actual issue. In fact, in the majority of cases, it made it worse.

The answer to getting your finances in order is to track your spending, work out where you are overspending and make cuts, work out a detailed budget that allows you to free surplus funds and pay down the debts as quick as possible.

I would check out Dave Ramsey's baby steps as a good plan to paying off your debt and getting ahead financially. It's US centric, but you can apply the same principles:

The loan to me would be a sort of boost. It would put me in a cash surplus and sort of get the ball rolling for me. I'd essentially be paying my bank £600 to get a headstart. I've been in a negative balance for so long, it has an effect on my motivation and positivity. Even though I am making money, I technically don't have anything. Logically the optimal thing to do is chip away at my overdraft until I'm in a postive balance.. As the cost of doing so is less than what I'd pay for a loan. But it means at least another four months before I'm all clear. So I guess it's a time vs. reward situation.. Being patient would cost me less. But having a clean slate now I feel would help me a lot.

The issue for me right now isn't spending, it's income. I'm on a zero hour contract so I don't make an adequate amount. I do make more than enough for the monthly payments however. But you're right, getting a loan isn't really solving the main issue. Which is that I need better employment . But I feel it would help me get in the right direction! It's funny that you mentioned Dave Ramsey.. I actually discovered him a couple of days ago doing my research. He has a really straightforward stance, it's all just maths.

Edit: So I checked with my bank today, and I have a 95% chance of being accepted for a 0% balance transfer card.. The credit limit is £1200. So with this I could load the remainder of my overdraft on there. But isn't high credit utilisation bad for my credit score? I'd rather use that card to improve my credit score.