Hello and question about secured loan figures quoted by a broker

Kalessin

Greetings everyone!
I have applied for and had an initial offer of a secured loan of £20,000 repayable over 144 months (12 years).  I am looking at lots of options, ranging from equity release to convoluted use of credit cards, balance transfers etc. in order to fund some overdue home improvement as I don't have savings.  

One of these options was a secured loan, via a broker (so far I haven't paid anything) who has come back with the following figures -

• Loan requested: £20,000
• Charges (broker and lender fees) £2,520
• APRC: 7.9%
• First 60 payments (5 years) repaid at a fixed APR rate of 4.55% - 60 monthly payments of £202.11
• Then 84 payment (7 years) repaid at a variable APR of 5.5% - 84 monthly payments of £208.xx (I forget, sorry)
• Total Repayable: £29,647.60 - 12,126.60 over the first 5 years and 17,521 over the next 7 years

So here is where I am asking for some beginner-level help with understanding how the interest rates work please:
How does the 'cash' borrowed - the loan and fees - which add up to £22,520, end up with a repayable amount of £29,647?  That is an additional £7,127.
I can't make this £7,127 square with either 7.9%, 4.55% or 5.5% but that's probably the bit I am missing.  And I don't think it can be compound interest ... 
I'd like to be able to model these offers in a spreadsheet or otherwise to be able to see what the impact of borrowing more or less over longer or shorter periods might be, but at the moment I can't get my figures up to line up.

Apologies if this is a really simple or schoolboy error - but the broker struggled to explain it, and simply said "this is all I can tell you - no-one's ever asked me about the interest before".  I was saying "£7k on top of the loan and charges looks more like 29% doesn't it?" and the conversation faltered, which is probably my fault.

What am I missing?  I don't think this is a scam so it will be really helpful for me to have a better understanding of how interest charges work over time and how to reverse engineer any quotes I receive so that i can really get the best value for money or terms that suit.  

Thanks in advance for any useful advice, and happy to share any more info if needed.
Chris

[Deleted User]

Kalessin said:

 was saying "£7k on top of the loan and charges looks more like 29% doesn't it?" 

It would only be 29% if you repaid it all within a year and made no payments until the final day.  Whereas you're borrowing over 12 years, at a high rate each year. 

The interest is calculated daily, so you would need to work through the figures over the two periods.

Put the figures into a loan calculator and you'll get an idea of how the interest builds and the benefits of repaying early. For ease, call it 5% APR over 12 years and you'll see that the figures come out close enough.

DrEskimo

Do you really need to borrow so much over such a long period? Can you not wait and save and borrow a much lower amount at a more competitive APR over a shorter period?

The second half of the loan is a variable APR too. Can you really afford for this to rise over the final 7yrs?

Kalessin

DrEskimo said:

Do you really need to borrow so much over such a long period? Can you not wait and save and borrow a much lower amount at a more competitive APR over a shorter period?

The second half of the loan is a variable APR too. Can you really afford for this to rise over the final 7yrs?

Thanks!  @DrEskimo As I said, I am just exploring different options - I'm not going to be able to save anything meaningful in a short enough period of time.  This offer does allows both overpayments and early repayment with no charges, which is something positive.

DrEskimo

The home improvements are already overdue, so is there a sudden rush to have it right now? can you not split the work into smaller jobs, in order or priority?

Also as you mention you have no savings, where is this surplus £200/month suddenly coming from if it hasn't been there for you to save over the last X years? Committing yourself to such a long loan period secured on your home, with 7-years at a variable rate is a very high financial risk IMHO.

No early repayment charges is sort of moot when you are having to fork over £2,250 in broker fees (along with 12-years worth of interest on top)....

sourcrates

Don’t like the word “variable” usually means it will go up, and that would be to whatever rate they choose, you could end up paying much more than he quoted, it’s not something I would be comfortable doing, save up and do the work in stages if it’s needed that much.

Kalessin

Deleted_User said:

Kalessin said:

 was saying "£7k on top of the loan and charges looks more like 29% doesn't it?" 

It would only be 29% if you repaid it all within a year and made no payments until the final day.  Whereas you're borrowing over 12 years, at a high rate each year. 

The interest is calculated daily, so you would need to work through the figures over the two periods.

Put the figures into a loan calculator and you'll get an idea of how the interest builds and the benefits of repaying early. For ease, call it 5% APR over 12 years and you'll see that the figures come out close enough.

Thanks @Deleted_User   I see what you mean with the loan calculator (I tried the Tesco one), and I have now found a few sites offering Excel formulas - I guess I was trying to grasp it intuitively at the same time.  Okay, assigning a daily interest rate to the remaining balance and totting that up as an annual total works out, but juggling the APRC at 7.9%, the fixed rate at 4.5% and the variable at 5.5% made it seem particularly opaque since he couldn't tell me how it was calculated.  To a degree the loan at least works in terms of affordability and the early repayment / overpayment options, but I'll let the other options play out and weigh them up before I sign anywhere!

[Deleted User]

Wouldn't be my prefered option but do you have a mortgage on the property? if so might the lender offer you a better deal at lower rates and without the £2500 in fees?

Kalessin

DrEskimo said:

The home improvements are already overdue, so is there a sudden rush to have it right now? can you not split the work into smaller jobs, in order or priority?

Also as you mention you have no savings, where is this surplus £200/month suddenly coming from if it hasn't been there for you to save over the last X years? Committing yourself to such a long loan period secured on your home, with 7-years at a variable rate is a very high financial risk IMHO.

No early repayment charges is sort of moot when you are having to fork over £2,250 in broker fees (along with 12-years worth of interest on top)....

@DrEskimo All good points.  The 20k is pretty much all one big thing, which I really would like to do this year - partly just as a reward for having made it through last year.  There's no savings scenario that gets me close in the next few years.

The savings are more accurately £200 I could survive without being in the disposable pot, having tidied up finances over the last 6 months or so, switching tariffs, downsizing some "luxury" services, using balance transfer to clean up some unnecessary charges etc.

I agree the length of loan is not great, and take your point about the fees.  Some remortgages or equity releases wouldn't cost as much.  But the issue is what offers I can get from lenders.  As some other threads here have discussed, a good credit score and history - or even being "in a good place" right now - doesn't seem to me to be the primary driver behind lender algorithms.  The affordability and risk windows are narrowing as I get older.

I did some "test-the-water" soft applications for smaller amounts, shorter repayment schedules on the phone with the big high street operators, and got offered more punitive interest rates and term limits, so having to spread the net wider.
But I agree, worth thinking carefully and I welcome all input here!

Kalessin

sourcrates said:

Don’t like the word “variable” usually means it will go up, and that would be to whatever rate they choose, you could end up paying much more than he quoted, it’s not something I would be comfortable doing, save up and do the work in stages if it’s needed that much.

@sourcrates Thanks!  Yes, I guess rates could go up significantly but the rolling average over the last 20Y is pretty low so perhaps grounds for  cautious optimism.  Unfortunately this is more or less a one-hit job that can't be spread out, so as discussed I'm looking for the best way to get the lump sum and trying to minimise the current and future financial impact ... still exploring options .

Kalessin

venison said:

Wouldn't be my prefered option but do you have a mortgage on the property? if so might the lender offer you a better deal at lower rates and without the £2500 in fees?

@venison Thanks - yes and yes (maybe not that lender).  Despite a pretty healthy current LTV, remortgaging is subject to a little tightness because of my age (and those algorithms I mentioned), equity release an option I'd have to review very carefully, but I'm making those enquiries also!