Confused about loans

emspy12

Hello, I have a question about small loans. Earlier last year, I took out a small (<£1,500) interest-bearing loan with PayPal. Later the same year, I bought an item online, on which a deal of interest free credit from PayPal was being offered, so I went ahead.

As these were separate transactions, I expected them to be handled separately by PayPal. I like to pay back loans regularly if I am able, so in the last few months I have made payments which I thought were going towards my interest-free loan (I put a direct debit arrangement in place to pay off the slightly larger, interest-bearing loan month by month).

After a time, though, I noticed that the level of the interest-free loan was not declining even though I was regularly paying into my PayPal credit account. When I contacted PayPal to learn why, they said they were legally bound to credit additional payments to my interest-bearing debt rather than the zero interest one. The only thing is that in this case, that would eventually result in my not having paid anything towards the zero interest loan by the date the interest free period expired—at which time I still would be only partway through paying off the interest-bearing loan using direct debits! So I would then have, effectively, to pay interest on my ‘interest-free loan’ after all, since no payments I was making were actually paying it off. Either that or find the full amount at short notice.

So I have two questions. Firstly, was PayPal acting correctly when it amalgamated two separate loans taken out at different times and with different interest arrangements? Secondly, one option their customer advisor offered was that my additional payment (intended to pay off the interest-free loan) would reduce the amount of interest I paid on the longer-term, interest bearing loan. But is this true? Won’t I still be required to pay the amount of the larger loan plus interest in full, as per our agreement? Or, if I don’t pay off the interest-free loan in time, to pay an unknown rate of interest on the whole of that sum, until the full debt is paid off, a year later? In the latter case, it would be better for me to save money separately, not pay it to the PayPal credit balance, and then pay back the whole lump sum of the ‘interest-free loan’. I have been advised that I will be alerted *after* the expiry date of the interest free period, and will then have 25 days to pay it in full before it incurs interest. This still worries me, because the agreement suggests I should be paying it off in full before the end of the interest free period ‘in order to avoid incurring interest on the loan’.

Opinions on the amalgamation of these two small loans without my agreement or knowledge, and on the best strategy for minimising interest overall, would be warmly welcomed. 

[Deleted User]

They're correct in assigning payments to the interest bearing loan.  The loans weren't amalgamated, but are kept separate so that payments don't get erroneously allocated to the interest free balance.

You'll be liable to pay the interest in force at any given time on each balance.

Sncjw

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Ebe_Scrooge

It's just the same, in effect, as any standard credit card - payments are always allocated to the highest-rate portion of the debt first.  Surely that's preferable from a consumer's point of view, as it minimises the amount of interest you pay.

emspy12 said:

one option their customer advisor offered was that my additional payment (intended to pay off the interest-free loan) would reduce the amount of interest I paid on the longer-term, interest bearing loan. But is this true? Won’t I still be required to pay the amount of the larger loan plus interest in full, as per our agreement?

As interest is calculated daily on the outstanding balance, you'll pay less interest if you clear the balance quicker - interest isn't "front-loaded".  Any illustration you were given that says "You'll pay £300 in interest" or whatever is based on you paying the same fixed amount every month, for the full term of the loan.  Pay more than the contractual amount and you'll end up paying less interest overall.

emspy12 said:

 if I don’t pay off the interest-free loan in time, to pay an unknown rate of interest on the whole of that sum, until the full debt is paid off, a year later? In the latter case, it would be better for me to save money separately, not pay it to the PayPal credit balance, and then pay back the whole lump sum of the ‘interest-free loan’. I have been advised that I will be alerted *after* the expiry date of the interest free period, and will then have 25 days to pay it in full before it incurs interest. This still worries me, because the agreement suggests I should be paying it off in full before the end of the interest free period ‘in order to avoid incurring interest on the loan’.

You do need to pay off the interest-free loan in full before the expiry date of the promotion.  The simplest way is to put money aside every month, then pay the whole lot off just before the promotional rate expires - a note in a calendar is a wonderful tool !

Overall, you've got two loans, both of which need to be repaid by a certain date.  As long as you've budgeted to do that (which it sounds like you have), then you'll be fine.  All Paypal have done is reduce the amount of interest you're paying.  If you've already made overpayments towards the interest-bearing loan, which it sounds like you have done (albeit unwittingly), then you'll get a pleasant surprise when that loan is repaid earlier than you were planning :-)

jpsartre

Sncjw said:

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Not necessarily in the long term. Say you have a 10 year £1000 loan at 5% and a £1000 interest free loan for 1 year that jumps to 50% interest rate when the interest free period runs. You may well be better off paying off the interest free loan before the interest free loan period runs out than paying towards the 5% loan.

FeaturelessVoid

jpsartre said:

Sncjw said:

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Not necessarily in the long term. Say you have a 10 year £1000 loan at 5% and a £1000 interest free loan for 1 year that jumps to 50% interest rate when the interest free period runs. You may well be better off paying off the interest free loan before the interest free loan period runs out than paying towards the 5% loan.

But in the real world a situation like that doesn't exist so it's a moot point.

jpsartre

FeaturelessVoid said:

jpsartre said:

Sncjw said:

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Not necessarily in the long term. Say you have a 10 year £1000 loan at 5% and a £1000 interest free loan for 1 year that jumps to 50% interest rate when the interest free period runs. You may well be better off paying off the interest free loan before the interest free loan period runs out than paying towards the 5% loan.

But in the real world a situation like that doesn't exist so it's a moot point.

Why would it not exist in the real world? Could easily be the case for the OP depending on the terms of their paypal loan. The interest free credit will probably jump to 25-30% interest once the interest free period is over which I'm guessing (and hope) is much more than the interest they're paying on their loan.

redpete

FeaturelessVoid said:

jpsartre said:

Sncjw said:

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Not necessarily in the long term. Say you have a 10 year £1000 loan at 5% and a £1000 interest free loan for 1 year that jumps to 50% interest rate when the interest free period runs. You may well be better off paying off the interest free loan before the interest free loan period runs out than paying towards the 5% loan.

But in the real world a situation like that doesn't exist so it's a moot point.

The numbers might have been chosen to make the point, but it is very likely that there would be costs involved if the first loan isn't paid off by the end of the interest-free period, and these could well be greater than paying off the second loan over it's planned period rather than early.

Exodi

I didn't think PayPal offered loans? If OP holds a typical credit balance with PayPal, I'd expect it will be the same/similar to that of the new BNPL product (after the fixed term).

The BNPL facility the OP is referring to is 0% fixed, 19.9% - 21.9% APR variable (depending on they took it out).

To be honest, some of the OP's comments about interest, amalgamation, etc are misguided and I think they probably need to do more research on the topic.

Exodi

redpete said:

FeaturelessVoid said:

jpsartre said:

Sncjw said:

Isn't it better to pay interest bearing loan over a interest free loan. You will save in interest 

Not necessarily in the long term. Say you have a 10 year £1000 loan at 5% and a £1000 interest free loan for 1 year that jumps to 50% interest rate when the interest free period runs. You may well be better off paying off the interest free loan before the interest free loan period runs out than paying towards the 5% loan.

But in the real world a situation like that doesn't exist so it's a moot point.

The numbers might have been chosen to make the point, but it is very likely that there would be costs involved if the first loan isn't paid off by the end of the interest-free period, and these could well be greater than paying off the second loan over it's planned period rather than early.

Does PayPal offer low interest loans? I share the view of FeaturelessVoid that the scenario you presented is entirely thereotical.

I would not be suprised if, after the 0% introductory term finishes, the balance would be added to the OP's other PayPal balance and subsequently charged at the same APR.

jpsartre

Well perhaps the OP could come back to clarify what rates they are paying, then less speculative advice could be given.