Warning about AA Loan Early Repayment

AndyHanners

4 years ago I took out an AA Loan over 5 years (through this site). Recently I asked for a settlement quote as I had some spare money to pay off the loan early. I was surprised to get a settlement quote that didn't give any interest rebate for early repayment. When I contacted them about it I was informed that they load the interest at the beginning of the loan, therefore if you settle early and you have already paid off the interest up front, you'll never get any of it back. I made a formal complaint which they rejected. I thought that kind of thing was against The Consumer Credit (Early Settlement) Regulations 2004? By the way the AA Loan is still being pushed on this site.

[Deleted User]

You've been misinformed.  Interest isn't front loaded, which is why they rejected your complaint.

By settling early you'll save on future interest.

MalMonroe

If you can just settle early without having to pay any penalty at all, wouldn't that be acceptable?

As zx81 says above, you won't have any future interest to pay.  

If I were you with that spare money, I'd get the loan paid off. Your credit report will thank you for it. Interest rebate? I've never had one, nor did I know it was a thing.

MallyGirl

there may be a penalty of 2 months interest for early repayment so you could repay nearly all of it to bring the interest right down but avoid that.

Interest is not front loaded but you do pay mostly interest at the beginning as interest is calculated on the outstanding balance. You pay a fixed amount each month so gradually you pay more capital off the loan as the interest decreases (calculated on the shrinking balance).
Ignore the numbers in the picture but this is the pattern of how your payments work - this is not front loading interest.

By the end you are paying much less interest as the outstanding balance is so much lower - repaying early at this late point will only save you the smaller interest payment you would have made in the future.

Sandtree

AndyHanners said:
they load the interest at the beginning of the loan, therefore if you settle early and you have already paid off the interest up front, you'll never get any of it back.

They dont load the interest up front, that's just how maths works.

When you take a loan in the UK you agree to pay a fixed amount each month as that makes life simple but that means in the early stages of the loan you are paying off the interest and only a modest amount towards the debt. In later stages when you've paid the principle down significantly the reverse is true so each month you are only getting a small interest charge but as your payments are the same that means a large amount is going to paying off the debt. For example

£10,000 at 0.5% per month interest with repayments of £100 per month (yes a very long loan)

Month 1 - interest is £10,000 * 0.5% = £50 therefore your repayment of £100 is £50 towards the interest and £50 towards the debt

Fast forward a few years and the debt has been paid down to £500 so now interest is £500 * 0.5% = £2.50 and so your £100 repayment is £97.50 towards the debt

The interest rate stays constant as a percentage but interest in absolute terms is high when the debt is high and low when the debt has been paid down

DrEskimo

To add to the great explanations above, you can calculate how much you are saving by simply subtracting the total amount of the loan if you run the full term (i.e. all monthly payments for 5-years) from all payments you have made to date plus the settlement figure.

The amount you save isn't returned to you as a rebate of any kind. It is realised by paying an overall lower amount than you would have otherwise paid had you just paid monthly for the entire 5-years.

AndyHanners

Sorry I think I didn't explain myself very well.

The settlement figure I was provided with is exactly the monthly repayment x the months remaining. Therefore if I settled now, other than perhaps helping with my credit score, there is no advantage. I'd be better off putting that money in a savings account for a year.

I just think that settling the loan a year early I should at least have been given some kind of reduction in the overall amount paid back.

AndyHanners

[Deleted User] said:

You've been misinformed.  Interest isn't front loaded, which is why they rejected your complaint.

By settling early you'll save on future interest.

I assume AA Loans record all calls, therefore if they listened back they would hear their own customer service agent use those exact words 

AndyHanners

MallyGirl said:

there may be a penalty of 2 months interest for early repayment so you could repay nearly all of it to bring the interest right down but avoid that.

Interest is not front loaded but you do pay mostly interest at the beginning as interest is calculated on the outstanding balance. You pay a fixed amount each month so gradually you pay more capital off the loan as the interest decreases (calculated on the shrinking balance).
Ignore the numbers in the picture but this is the pattern of how your payments work - this is not front loading interest.

By the end you are paying much less interest as the outstanding balance is so much lower - repaying early at this late point will only save you the smaller interest payment you would have made in the future.

Seems like the most logical explanation, any small amount of interest I would have saved has been eaten up by penalties

AndyHanners

DrEskimo said:

To add to the great explanations above, you can calculate how much you are saving by simply subtracting the total amount of the loan if you run the full term (i.e. all monthly payments for 5-years) from all payments you have made to date plus the settlement figure.

The amount you save isn't returned to you as a rebate of any kind. It is realised by paying an overall lower amount than you would have otherwise paid had you just paid monthly for the entire 5-years.

And the result - saving absolutely nothing as the settlement figure is exactly the amount of monthly repayments x months remaining

[Deleted User]

AndyHanners said:

Deleted_User said:

You've been misinformed.  Interest isn't front loaded, which is why they rejected your complaint.

By settling early you'll save on future interest.

I assume AA Loans record all calls, therefore if they listened back they would hear their own customer service agent use those exact words 

Probably not. Few companies do.

They've given you the wrong information, that's all