Is it worth overpaying a loan?

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Tranquil
Tranquil Posts: 67 Forumite
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Hi
I’m trying to figure out if it’s worth overpaying (reasonable small amounts), saving up to make a larger overpayment, or no overpayment on a loan? The loan has 10.3% interest and I have another couple of years paying monthly. I’m struggling to understand the loan documents that say I can overpay but will be charged daily interest (or something to that effect) for the loss the bank will have. Any help appreciated!

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  • nicmalauren
    nicmalauren Posts: 94 Forumite
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    Bottom line is, if it is of no benefit to you, don't overpay.

    In most cases, it's advisable to overpay any debt you have as the savings you make in terms of interest on the debt are higher than any interest that you could earn by having the money saved in an account elsewhere. However, if your loan agreement states that the bank will take the full amount of interest anyway, it's not worth your while. That said, I've never heard of a stipulation like that before... Could you possibly post the wording from the documents here along with some other info about the loan (length, monthly payment amount etc) to see if we can help you decipher it?
    "The future belongs to those who believe in the beauty of their dreams."
  • EssexHebridean
    EssexHebridean Posts: 21,372 Forumite
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    It may be that you can pay it all off early without penalty, but not make little OP's on the way along. If so, open a savings account that pays interest and transfer your OP's to there, then when you have enough to clear the loan in its entirety, you can do so.
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  • enjoyyourshoes
    enjoyyourshoes Posts: 1,093 Forumite
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    Give them a call and ask if there is an early repayment charge, &/or if you can pay off part of the loan without any penalty.

    Get them to assist you.
    Debt is a symptom, solve the problem.
  • System
    System Posts: 178,094 Community Admin
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    It's also worth considering whether or not the bank pre-loaded the interest charges to the beginning of the loan, as that means you'll be no better off paying if off now.


    If the bank add the interest per month, you'd probably save a bit of money.


    I had a loan of 11k over five years on 2.5% (something like that), interest was approx £20 per month. I could have paid it off but I got quite a bit of comfort knowing I had the loan in the bank (car ended up being purhcsed back off me by the dealer) for £20 per month in case of any emergencies.
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