Allocation of an Overpayment

Superhoopza

Ok this was also posted on my salary finance thread but may have more visibility here. I made an additional payment on top of my monthly repayments, of £500. I didn't see a change in my payments so contacted the loan provider. Here's the response:

They are saying my overpayment will go towards the end of the loan term and bring forward the date of when the last scheduled payment is.

Therefore they have not reduced my principal amount of which monthly interest should be charged. This has meant the £500 additional payment on a loan with another 15 months remaining is only saving me about £5, as I am only saving the interest that would be charged in the final month of the loan, not a saving every month. That's wrong isn't it?

Thanks all

[Deleted User]

No, it's correct, but explained poorly and therefore understood wrongly. 

It's reduced your balance from when you paid it. They just mean you won't really see the impact until you get to end of the term and it finishes early, but you'll be saving interest from now.

Superhoopza

Ok thanks but if I had 12 months left, then £500 extra paid at 9.9% a year should save me £50 should it not? And I have 15 months left so it should be a higher saving? My total repayable amount has only dropped by £505 so £5 interest saved. What am I missing?

[Deleted User]

Ask them for your current balance or a settlement figure, so that you can see how you balance has reduced.

Thrugelmir

Superhoop91 said:

Ok thanks but if I had 12 months left, then £500 extra paid at 9.9% a year should save me £50 should it not? And I have 15 months left so it should be a higher saving? My total repayable amount has only dropped by £505 so £5 interest saved. What am I missing?

Interest is calculated daily and charged monthly. The saving will accrue over the months to come. Next month you will save  another £5 and so on and so on. 

Superhoopza

Thrugelmir said:

Superhoop91 said:

Ok thanks but if I had 12 months left, then £500 extra paid at 9.9% a year should save me £50 should it not? And I have 15 months left so it should be a higher saving? My total repayable amount has only dropped by £505 so £5 interest saved. What am I missing?

Interest is calculated daily and charged monthly. The saving will accrue over the months to come. Next month you will save  another £5 and so on and so on. 

That's the point I'm trying to make, I can see my next repayment amounts and my total outstanding amount to be repaid and none have changed except my final month's repayment amount, which has gone down by £5 roughly.

Thrugelmir

Superhoop91 said:

Thrugelmir said:

Superhoop91 said:

Ok thanks but if I had 12 months left, then £500 extra paid at 9.9% a year should save me £50 should it not? And I have 15 months left so it should be a higher saving? My total repayable amount has only dropped by £505 so £5 interest saved. What am I missing?

Interest is calculated daily and charged monthly. The saving will accrue over the months to come. Next month you will save  another £5 and so on and so on. 

That's the point I'm trying to make, I can see my next repayment amounts and my total outstanding amount to be repaid and none have changed except my final month's repayment amount, which has gone down by £5 roughly.

Your monthly repayment amount won't change. This is contractually fixed. The benefit to you is settling the debt earlier than you would have done. 

theoretica

What does your loan T&Cs say about overpayments and recalculation of interest?

nyermen

You need to look at your agreement for information on overpayments.

What is being suggested by others is it will come off the principal now, but in reality the affect on interest wont show much until the end (amount is deducated now from outstanding principal)
But what you are suggesting is different (I think) - that in fact they will hold the payment in "reserve" and just use it for the final payment (and mean time it's not deducted from Outstanding Principal)

What you're suggesting is indeed not common (imo - I've not seen it before, except as part of some very special mortgage types in france called comfort mortgages - I worked for a time in compliance + Asset & Liability Management software, and so had to model many types of loan) but presumably could be legal if the agreement and regulator say so.

Superhoopza

nyermen said:

But what you are suggesting is different (I think) - that in fact they will hold the payment in "reserve" and just use it for the final payment (and mean time it's not deducted from Outstanding Principal)

Yes this seems the most appropriate way of describing what has happened.

In regards the T+C's, it's deblirately vague, these are the only two references:

On the FAQs:

There is no fee for early repayments and you will actually PAY LESS interest overall as you will have the loan for less time"

My specific contract also states the following:

9.9% APR

For the purposes of calculating the APR, we

assume that:

you do not repay part of your loan early.


It's really annoyed me that they've been able to do this. I won't bother making over payments on this loan again if my total interest only changes by so little.

Superhoopza

So except nyermen, nobody actually knows then.