Loan in arrears - interest help

T0502

I’ll try to keep this short but hopefully be as clear as possible....

I took out a £20k loan in Oct 2017 for 7 years. I made all the contractual payments in full, on time, each month until Aug 2019. My financial situation changed which meant I was unable to pay the contracted amount so I contacted CAB. They helped me out with an informal payment plan for a reduced monthly amount which the loan company accepted. I’ve been paying this reduced amount up until last month. I’m now back to my contracted monthly amount but theres quite a large arrears balance that has built up.

I was under the impression (after being told by one of the loan companies advisors), that if i stuck to the monthly contracted amounts from here forward AND cleared the arrears asap the loan would end as planned in Oct 2024. There would be no ‘extra’ interest as its calculated on the outstanding balance each day, so it takes into account that it’s higher than it should be during any period of arrears & adjusts accordingly.

Today, a different member of staff has told me that the above is incorrect. The interest is calculated on what the balance is expected to be each day, as though I wasnt in arrears. Therefore, at the end of the term there would be an additional amount of interest added to account for any period where I have been in arrears. They couldn’t tell me how much it would be or how it’s calculated, just that there would be this ‘additional’ amount added to my final month in Oct 2024.

Does anyone have experience of this? It seems bizarre that I’ll pay back everything borrowed in the planned timescale but then be hit with an unknown amount at the end? Moreso that interest is being added every day but then theres more to be added at the end of the term?!

I’ve read my original loan T&Cs but they make no sense. I’m waiting on the loan company coming back to me with more clarity but given I’ve been given constant inconsistent advice I’m not feeling hopeful! 

Any help would be appreciated x

[Deleted User]

They're correct. 

Your payments assume that you will make all payments on time and therefore generate a known amount of interest.

By missing payments, your daily balance is higher, generating more interest which is not covered by your contractual payments.

It's this additional sum which needs to be paid.  The quicker you bring the balance down, the less additional interest.

T0502

Thanks for your reply! 

How would the additional interest be calculated? Is it a percent of every day I’m in arrears or something? I’m worried it’ll be a huge amount given i’ve been in arrears for 13 months already & i’m anticipating it’ll take at least another 9-12 months to clear. Is it possible to work out a rough figure if I know the time scale I’ve been in arrears & the interest rate of the loan maybe? 

[Deleted User]

The APR is broken down into a daily rate. 

But you can get a rough figure by taking the total arrears amount and calculating a couple of years interest on it.  So if it's 10k and your APR is 5%, it'd be in the region of £1k, assuming the arrears were built up and cleared in one go.

That's why clearing them ASAP is the smart thing to do.

Thrugelmir

Interest is calculated on the daily balance and charged in arrears on a monthly basis. Normally every month your payment would have covered this interest and reduced the capital balance owed.  By paying reduced amounts you may not not have even covered the interest. As a consequence the balanced owed would have increased. Ideally you need a statement of account from the lender to ascertain the position you are now in. Needless to say the earlier and more you can pay, the quicker you'll settle the debt owed. 

TadleyBaggie

The interest would be calculated the same way as when you weren't in arrears, daily on the current balance.

foxy-stoat

How much were your contracted payments, how much did you actually pay for the 12 months and what is the interest rate of the loan.  You may want to check if they were charging you anything for not making the contracted payments.  You should get an annual statement at some point so you will know the figures soon enough.

In the mean time, try and overpay if you can to reduce the pain later.

T0502

Thanks everyone. You’ve made it make much more sense than i’ve managed to get out of the loan company!!

Foxy-stoat - My contracted payments were £263. I was paying £50 for 13 months. My current arrears is £2819. Loan APR is 2.9%. From what they’ve told me on the phone I’ve not been charged anything extra for not meeting the contracted payments.
Is it possible to calculate the rough figure they’ll be adding on from this info?

fwor

Without knowing exactly when you will overpay and by how much it's impossible to say with accuracy. But you can do a rough guess in your head (almost). If you started with no arrears and now have £2800-worth you will on average have had £1400 of arrears over that period. Take 2.9% of that and multiply by 13/12 to account for the 13 months instead of 12. Now assume you will overpay at about the same rate over 13 months - this adds almost exactly the same amount of interest again.

This results in a figure of just under £90 additional interest. I should add that this is very simplistic, because it ignores factors such as compounding - but it's probably good enough. In rough terms you shouldn't pay more than around £90 in extra interest if you pay the arrears down over the coming 13 months.

T0502

Thanks so much, that makes sense. I’m hoping to clear them asap, especially now I know how this additional interest works! Thanks again everyone