Settlement figure higher than expected

Lionkaz

Can anyone advise please. I took out a conditional loan agreement to purchase a vehicle.  I knew at the time the interest was high at 48.9%. I have had the loan for 18 months. Required a settlement figure because unfortunately my car has been written off in an accident. But they tell me my settlement figure is around £200 more than I expected because more than 80% of my monthly repayment went to paying interest at the beginning. On a loan of 7299 with an interest rate and apr of 48.9 and total interest payable of 7354. After 18 months my balance is over £6000. I have seen the breakdown of interest vs capital repayment figures and am shocked to see that of 311 payment per month in the first month I paid over 260 just for interest and so on and so forth. I am looking to argue this point. After 18 months 5600 paid and 2000 deposit. I have no car and no money from car write off as it all has to go to paying the finance company and in fact I’ll still owe them £700. I am devastated. Loan does state interest is calculated on the outstanding balance. However should they not have broken this down for me in the beginning 

Clive_Woody

This is how loans work, in the earlier months a larger amount of each monthly payment goes towards the interest payment, as the amount owed (capital) gradually reduces then you are paying less interest and more capital off each month. Your loan agreement would have stated APR, total amount repayable and monthly repayment, not sure they normally give a monthly breakdown of interest and capital. Not sure what there is to argue.

I am guessing you did not have GAP insurance for your car?

Petriix

That's an insane interest rate! I'm surprised that it's even legal to charge that much but find it astonishing that you actually agreed to it. It would have been way cheaper to buy it on a credit card not to mention a standard bank loan or a new car on 0%.

Car finance (PCP) is structured in such a way that you typically owe more than the vehicle is actually worth until the very end of the agreement. Because you are paying interest on the whole loan, you will always start off paying more interest and less capital. In your case the interest is a lot!

For £311 per month you could have been driving a brand new £20k car so I'm not sure what circumstances led you to make that particular choice. Unfortunately you don't appear to have grounds for complaint apart from maybe with the insurance company (assuming that you weren't at fault?).

One tiny glimmer of hope is that you might be able to avoid some of the interest if you request a new settlement figure after the insurance money has been paid towards the loan. I believe they can only add 60 days interest for the outstanding balance so it may be a fair bit lower.

MEM62

This is one of the reasons why I have always held (and expressed in these forums) the opinion that borrowing money to buy a car is madness.  You are paying interest to purchase an asset with a value that falls like a stone.  If people actually looked at the costs of their vehicles in with interest added to depreciation, many would make different choices.  But I guess it is true that shiny car syndrome is a powerful draw.        

Nearlyold

Petriix said:

That's an insane interest rate! I'm surprised that it's even legal to charge that much but find it astonishing that you actually agreed to it. It would have been way cheaper to buy it on a credit card not to mention a standard bank loan or a new car on 0%.

Car finance (PCP) is structured in such a way that you typically owe more than the vehicle is actually worth until the very end of the agreement. Because you are paying interest on the whole loan, you will always start off paying more interest and less capital. In your case the interest is a lot!

For £311 per month you could have been driving a brand new £20k car so I'm not sure what circumstances led you to make that particular choice. Unfortunately you don't appear to have grounds for complaint apart from maybe with the insurance company (assuming that you weren't at fault?).

One tiny glimmer of hope is that you might be able to avoid some of the interest if you request a new settlement figure after the insurance money has been paid towards the loan. I believe they can only add 60 days interest for the outstanding balance so it may be a fair bit lower.

They can levy Early Settlement charges on both full and part repayment,  - the loan terms and conditions will state whether they do.  

molerat

Petriix said:

That's an insane interest rate! I'm surprised that it's even legal to charge that much but find it astonishing that you actually agreed to it. It would have been way cheaper to buy it on a credit card not to mention a standard bank loan or a new car on 0%.

Car finance (PCP) is structured in such a way that you typically owe more than the vehicle is actually worth until the very end of the agreement. Because you are paying interest on the whole loan, you will always start off paying more interest and less capital. In your case the interest is a lot!

For £311 per month you could have been driving a brand new £20k car so I'm not sure what circumstances led you to make that particular choice. Unfortunately you don't appear to have grounds for complaint apart from maybe with the insurance company (assuming that you weren't at fault?).

One tiny glimmer of hope is that you might be able to avoid some of the interest if you request a new settlement figure after the insurance money has been paid towards the loan. I believe they can only add 60 days interest for the outstanding balance so it may be a fair bit lower.

Generally people taking out these high rate conditional loan agreements don't have the option of credit cards with a high limit, let alone 0% on that card, or mainstream bank loans.

In answer to the OP's original question, it is the way all loans work.  The amount of interest charged is based on the outstanding daily balance and you have no cause for complaint.

MinuteNoodles

Lionkaz said:

I have seen the breakdown of interest vs capital repayment figures and am shocked to see that of 311 payment per month in the first month I paid over 260 just for interest and so on and so forth. I am looking to argue this point. 

There is nothing to argue. The interest is charged on the amount owed, either calculated daily, weekly or monthly, it's not split equally over the period of the loan. So at the start of the loan you owe the most money so that's when you pay the most interest. As the capital owed goes down so does the interest so more of the payment goes to paying off the capital than the interest. 

Using this calculator it shows that on month 18 on that loan if it were a 5 year loan just £26.50 of your £311 payment is going towards paying off what is owed.
If you want to verify if their figures are correct use that loan calculator, just sit there with a stiff drink when you're looking at how little per month you're paying off. If you take loans with high APRs where you'll end up paying twice the amount you borrow then this is the reality of how your payments break down.