[Personal Loan] Does it ever make sense to repay in full early vs overpaying?

zoonyx

I've been going around in circles on google, MSE and the various bank websites.  I must be being thick here, because I can't find a simple guide.
I took out a £10000 personal loan in November 2020 to consolidate debt.  2.9% APR over 60 months, total cost around £10800.  It's with Tesco Bank and they have an ERC.
I am now in the unexpected and fortunate position to repay this in full.  My default decision would be to pay it off ASAP and be debt free.  I just don't want to waste money unnecessarily, and I can't work out how best to do this.  

It appears that overpayments are free, but early settlement will cost 2 months interest.  I don't understand how this works - can I leave a minimum amount against the loan for the remaining 4 and a bit years.  Why would a bank allow this 'gaming' of the system?  If I choose the other repayment option of bringing my final payment forward due to that overpayment, do I still get charged 2 months interest at that final month?

Apologies if I am just being thick or missing a sticky thread somewhere, I must be searching for the wrong terms or something.

PS: Another question, my credit rating is excellent (which shows how crap the system is!), will paying it off early or overpaying affect my rating? In part I wish to be debt free in order to buy a house longer term with a mortgage.

[Deleted User]

Yes, it nearly always makes sense to repay a loan early. 

If no interest is charged on partial overpayments, pay all but a month's worth and let the next DD take the final payment. Any surplus will be returned.

zoonyx

Deleted_User said:

Yes, it nearly always makes sense to repay a loan early. 

If no interest is charged on partial overpayments, pay all but a month's worth and let the next DD take the final payment. Any surplus will be returned.

So given the circumstances (namely, ability to pay).. if I overpay all but the final DD, they would then take the final DD next month and I wouldn't have to pay an ERC?  Why would anyone just get an early settlement figure then?  
and this wouldn't affect my credit rating? Would Tesco Bank (or others) view me poorly in future?
Thanks for your help.

[Deleted User]

That's correct. 

People get an early settlement figure when an ERC is paid on partial overpayments and the best thing to do its to pay it all off as quickly as possible.

Tesco may view you as less profitable, but it makes you look less reliant on credit.

zoonyx

Deleted_User said:

That's correct. 

People get an early settlement figure when an ERC is paid on partial overpayments and the best thing to do its to pay it all off as quickly as possible.

Tesco may view you as less profitable, but it makes you look less reliant on credit.

That's brilliant.  So in summary, it is what I would have expected - I think I went around in so many circles I was looking for a reason why I'd end up doing the wrong thing or get charged excessively.

Thanks so much for the reply

Nebulous2

At this point in the loan you will be paying just over £20 a month in interest. If you delay repaying it for two months you will have paid that out anyway. If you do repay it you will be in profit from month three.

Surely it is worth getting rid of it for forty quid which you will be paying anyway if you leave it? 

kimwp

zoonyx said:

Deleted_User said:

Yes, it nearly always makes sense to repay a loan early. 

If no interest is charged on partial overpayments, pay all but a month's worth and let the next DD take the final payment. Any surplus will be returned.

So given the circumstances (namely, ability to pay).. if I overpay all but the final DD, they would then take the final DD next month and I wouldn't have to pay an ERC?  Why would anyone just get an early settlement figure then?  
and this wouldn't affect my credit rating? Would Tesco Bank (or others) view me poorly in future?
Thanks for your help.

This worked for me with my mortgage (not with tesco). Give tesco a call if you are not sure and ask them what the charges will be if you do this.

londonice

I recently took out a loan for 9k to get a car and received the insurance settlement.  So I've paid off almost the whole amount minus one month's instalment. See if this works!

londonice

Hi again guys.

I thought to update you all that my loan has been satisfied and the account closed based on partial overpayment excluding one month's instalment!

Thanks for the tip and hope this helps others avoid a potentially arduous settlement. 

user1168934

"Paying everything except a month's installment ..." is a near trick I did not know before reading these replies. This is not my thread but many thanks to everyone who replied - very useful.