Loan Settlement Question

BnEc

I'm looking to settle a loan with Admiral, whats the best way to go about this to reduce the amount of interest I am paying. 

For context the loan amount is £11,685 the settlement figure is £10,432 this includes an 58 day interest charge of £137.

2 questions:

1. Is there a smarter way to pay off this loan than using the settlement figure?
2. Why is the interest charge 58 days?

Thank in advance. 

CliveOfIndia

BnEc said:

1. Is there a smarter way to pay off this loan than using the settlement figure?

One method that often works is to pay off most of the loan, then let your last DD settle the remainder.  Let's say your monthly payment is £100, you make a one-off payment sufficient to clear all but £100 of the loan, then let your last normal payment settle it.  Just check that you're allowed to make overpayments without penalty.

BnEc said:

2. Why is the interest charge 58 days?

That's the maximum penalty that any lender is allowed to impose - 2 month's worth of interest (well, 2 months near as dammit).  If there's less than a year left to run on the loan, then they can only charge up to 1 month's interest.

It's possible that you may find a lender who charges less than this (though I suspect it's unlikely), but they're not allowed to charge more.

retiredbanker1

My reply to an earlier similar question

https://forums.moneysavingexpert.com/discussion/comment/81197242#Comment_81197242

BnEc

Thank you for the responses, sadly I don't have enough to cover the loan balance less one month DD, so I'll just have to chalk this up to a lesson learnt. 

molerat

Any overpayments will reduce the interest paid provided there is no penalty.  What is the APR of the loan ?

BrotherUuurgh

Just a note from personal experience, it might just be worth a quick check to see if interest is fixed. I found out recently that one of my loans is fixed interest meaning overpayments will reduce the term only, not the interest paid, as all the interest was added at the start and subsequent payments have cleared only that. 

CliveOfIndia

BrotherUuurgh said:

Just a note from personal experience, it might just be worth a quick check to see if interest is fixed. I found out recently that one of my loans is fixed interest meaning overpayments will reduce the term only, not the interest paid, as all the interest was added at the start and subsequent payments have cleared only that. 

I think you're misunderstanding how the interest is calculated.  Front-loading of interest has been illegal for many years now, any overpayments you make will ultimately reduce the amount of interest you're charged.  Interest is calculated (whether daily, weekly or monthly) on the total outstanding balance - make an overpayment to reduce the balance and you'll end up paying less interest.

Towards the start of a loan, a large proportion of your monthly payment clears that month's interest, only a relatively small proportion goes towards the capital.

As time goes on the capital reduces.  So each month the amount of interest reduces - meaning more of your payment goes towards the capital.

If you make an overpayment, different lenders have different approaches.  Some will keep the monthly payments the same and reduce the term, others will keep the term the same and reduce the monthly payments.  A lender will take one approach or the other by default, but you can usually phone them up and ask them to either reduce the term or the payments, whichever you prefer.

BrotherUuurgh

Indeed I may be misunderstanding. When I logged in to my account I noticed the phrase "fixed interest" under one of the transactions. Every normal payment since then has reduced the outstanding balance. If I look at my other loan account, it shows how my monthly payment is broken into capital and interest.

In this case I'm guessing that if I make overpayments and clear early, then they'll work out a rebate of sorts?