Clarification on interest treatment for partial early repayment on fixed-rate personal loan

TurboHitch

I’m looking for clarification on how interest is treated on a UK fixed-rate personal loan when making a partial early repayment, as I’ve received mixed explanations and want to ensure I fully understand my position.

Loan details (summary):

• Lender: M&S Bank (Marks & Spencer Financial Services plc)
• Loan amount: £13,000
• Term: 48 months
• Interest rate / APR: 6.0% fixed
• Monthly repayment: ~£304
• Loan regulated under the Consumer Credit Act 1974

The agreement states that:

• Interest is a fixed rate and repayments are calculated upfront.
• I can repay part of the loan early at any time.
• If I repay part of the loan early, the overall cost will usually be reduced, but the monthly repayment stays the same and the loan term shortens.
• A separate rule applies only to full early settlement, where interest is calculated up to 28 days after notice plus an additional month.

My question:
If I make a partial early repayment of £6,000 (with the loan not being fully settled):

1. Is interest thereafter charged only on the reduced outstanding balance, meaning I stop paying interest on the £6,000 from the point of overpayment?
2. Or am I still effectively paying the full originally calculated interest, just over a shorter period?

Customer services have said the full interest repayment amount cannot be reduced (which I understand), but I want to confirm definitively whether the total interest payable is reduced following a partial early repayment on this type of loan.

Altior

Option 1. The reduced capital balance to be precise.

TurboHitch

Thank you - when I called M&S they said "the fixed amount is on the initial loan and there is no point in paying early as I will still be paying full interest, would only be worth it to pay the settlement as this clears the interest" - is this not correct then? 

CliveOfIndia

TurboHitch said:

Thank you - when I called M&S they said "the fixed amount is on the initial loan and there is no point in paying early as I will still be paying full interest, would only be worth it to pay the settlement as this clears the interest" - is this not correct then? 

That's incorrect.  Interest is calculated - either daily, weekly or monthly - on the outstanding amount.  If you reduce the outstanding amount, you pay less interest overall.

TurboHitch said:

there is no point in paying early as I will still be paying full interest

This would only apply if the interest was front-loaded - which has been illegal for many years now.

You'll still pay the full APR, as it were, of 6% - but only on the reduced outstanding balance.

Altior

TurboHitch said:

Thank you - when I called M&S they said "the fixed amount is on the initial loan and there is no point in paying early as I will still be paying full interest, would only be worth it to pay the settlement as this clears the interest" - is this not correct then? 

Maybe agent misunderstanding or miscommunication. It happens. Call them again and ask them how many more payments will you need to make with an overpayment of £X (eg £6K). I would expect the total repayment (what you have already paid, the OP and the remaining repayments) to be less than the original £14592. The interest rate is not horrendous and you'll have been paying the highest amount of interest at the start, so the difference won't be huge.

Highlanddream

Hi, this is interesting I am in a similar position, I am hoping to increase my repayments ( from 225 to 1000) to pay off the loan early. On the app, they show all of the interest front loaded - although I realise this is for information only. It makes it really hard to figure out the actual interest. I am planning to ring them when the capital goes down to a £1000 to get a settlement figure and see what happens! I figure I will pay the interest on the 1000 left but will have a reduced payment due to the figures on the app being front loaded - does that make any sense??

Altior

https://forums.moneysavingexpert.com/discussion/comment/81865223#Comment_81865223

That approach doesn't usually make sense, as if you have an 'early settlement' payment you will usually pay early settlement fees.

What you'd usually want to do is pay the last few contractual payments as normal to clear the account. They will of course be brought forward if you are overpaying.

You can easily estimate what the interest will be on whatever the capital balance is yourself. For example, if you take it down to £1K and the interest rate is 6.6%, you do 1000 * 0.066 = 66. 66/12 = £5.50. Not accurate to the penny, but that's not needed. It will be lower on the next month, with the reduced capital balance with the contractual payment.

You do need to find out exactly how your lender treats part/over payments on top of the contractual obligation.

Highlanddream

This is also a Mark's & Spencer loan with varying answers when you speak to them! Other than I will get an interest 'rebate' due to the interest being added 'up front' on the app figures. As I am hoping to pay it off within 12 months instead of 39 months, this will be noticeable.

Altior

This is a mainstream lender and a conventional loan.

Making overpayments
Making overpayments to your existing loan may reduce the amount of interest you pay. Customers can transfer electronically from their current account or pay by debit card. You can make overpayments free of charge by contacting our Customer Services team on 0800 363 400.

BIB is me.

Their t&c aren't explicit unfortunately but I can't see any indication that overpayments would be treated differently to what one would anticipate. That is that the overpayment would reduce the capital balance of the loan. The contractual payments would continue, but the account would be cleared much faster ie the amount of interest on the next payment would be lower, meaning the capital element would be higher, though the payment total remains static.

The settlement charges appear only to apply if the account is fully settled by an overpayment.