Personal Loan - early repayment

guyzie

Hello, I have a personal loan with Barclays. It was  £25k loan over 5 years which I pay £525.41 per month. I have 13x payments left (£6,468.80) and am planning on calling Barclays to ask them if they will give me a discount if I settle in full next month. Before I do this, I'd like to understand how the repayment of a loan is structured - do you pay back the money borrowed first and then the interest or vice versa ? Has anyone got any tips on approaching such discussions with a lender ? Thanks in advance

[Deleted User]

guyzie said:

Before I do this, I'd like to understand how the repayment of a loan is structured - do you pay back the money borrowed first and then the interest or vice versa ?

Neither. Each payment pays off a mix of capital and interest.  As the balance drops, more of the capital is paid off as less interest is generated.  By paying off early, you avoid the future interest that would be generated.

You won't get a discount on the debt unless you're heavily in arrears and ideally defaulted, so don't ask for that when you call.  Just ask for the settlement figure and pay that.

guyzie

Thanks for your reply. When I see the settlement figure online, it's the same as the balance - so looks like no discount available, or do I call and ask for that ? Thank you

[Deleted User]

The settlement figure is the current outstanding balance, with up to 60 days interest added for early settlement.  Call them if you're not sure what you;re looking at.

But as above - don't ask for a discount.  You want to settle the debt, not default on it (unless you do want to default of course.)

guyzie

Thank you for your time, much appreciated

DrEskimo

According to an online settlement calculator, the settlement figure would be about £6,560.
If you left it to run, you would pay another 13months worth of £525.41, which is £6,830.33. 

So settling today would save you around £300 in interest.

Check whether they charge a settlement fee though (as @Deleted_User says, this can be up to 60days worth of interest), as that would minimise the saving. 60-days interest is around £100 in fees I think, based on an APR of 10%.

MallyGirl

Useful graphic on how your payment is made up - ignore the fact that it says it is for a mortgage.
At the beginning you owe lots so lots of interest is being incurred. By the end you don't owe much so little interest and mostly capital being paid.

Numberwang_2

Could OP just make an overpayment, leaving say £1050 to be cleared by 2 months payments to clear the balance, thus avoiding an early repayment/settlement charge?

Nearlyold

Numberwang_2 said:

Could OP just make an overpayment, leaving say £1050 to be cleared by 2 months payments to clear the balance, thus avoiding an early repayment/settlement charge?

That may work, however lenders are allowed to charge an Early Settlement Fee on both partial and full settlements.
When the European Consumer Credit directive which made the ability to make partial repayments a statutory right came into force the UK amended the Early Settlement Regulations to permit lenders to also charge settlement fees on partial repayments.