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    • Tozom
    • By Tozom 10th Jul 18, 9:29 PM
    • 40Posts
    • 0Thanks
    Tozom
    Best way to pay off higher interest loan
    • #1
    • 10th Jul 18, 9:29 PM
    Best way to pay off higher interest loan 10th Jul 18 at 9:29 PM
    Looking for someone to help me with the maths of proving the benefit of paying off a higher interest loan. Father in law got us a loan for 5.8% after buying a house but now my credit score has improved... I think I know ill be better off but i can't get my head round how to calculate it!!

    Existing loan
    13,000
    5.8%
    249 per month
    14,940 total to pay over 5 years

    Ive paid 9 payments of 249x9=2,241 which, if i took that off my original loan amount leaves me with 10,759. To repay the loan early, the balance is 11,377, so the loan if i repay would have cost me the difference of 618... right!?

    Ok so proposed loan would be 2.8% and i can take either 4 or 5 years. 4 means repaying 3 months earlier (already done 9) or 5 would extend it but it has a very attractive reduced monthly payment.

    4 years - monthly 250.64 - 12,030.72
    5 years - monthly 203.24 - 12,194.40

    Am I still saving money by taking out the 5 year new loan compared to sticking with the existing 5.8%. If so, how do i work out how much!? Help appreciated!
Page 1
    • venison
    • By venison 10th Jul 18, 9:44 PM
    • 2,209 Posts
    • 2,383 Thanks
    venison
    • #2
    • 10th Jul 18, 9:44 PM
    • #2
    • 10th Jul 18, 9:44 PM
    You have to remember 2 things 1) your credit "score" means nothing its just a made up number and 2) you are not guaranteed to get the advertised rate of 2.8% as only 51% of those who are successful will get that rate, you might you might not.
    You say FIL "got you a loan" was it in his name?
    Former Board Guide
    • Tozom
    • By Tozom 10th Jul 18, 9:57 PM
    • 40 Posts
    • 0 Thanks
    Tozom
    • #3
    • 10th Jul 18, 9:57 PM
    • #3
    • 10th Jul 18, 9:57 PM
    You have to remember 2 things 1) your credit "score" means nothing its just a made up number and 2) you are not guaranteed to get the advertised rate of 2.8% as only 51% of those who are successful will get that rate, you might you might not.
    You say FIL "got you a loan" was it in his name?
    Originally posted by venison
    Yes I understand that and yes it was.
    • DrEskimo
    • By DrEskimo 10th Jul 18, 10:35 PM
    • 130 Posts
    • 96 Thanks
    DrEskimo
    • #4
    • 10th Jul 18, 10:35 PM
    • #4
    • 10th Jul 18, 10:35 PM
    Think I've done the maths for you.

    So the 13k loan @ 5.8% would cost you 1,940 if you ran it for the entire 5-years.
    If you settle the loan in 9-months, you would have paid 618 in interest.

    The new loan of 11,377 @ 2.8% to settle the previous loan will cost you 817.54 in interest over 5-yrs. Adding the initial 618 you paid on the first loan, that's a total of ~1,435 in interest over 5yrs 9months.

    So it would be ~505 cheaper to get a new loan on the settlement at 9months @ 2.8% over 5-years, than it would be to continue to run the loan at 5.8% over the next 4yrs 3months.

    Although why not maintain the same payment on the 2.8% and get it over 4-years? That will cost just 653.76 in interest, which added to the initial interest you have paid is a total of 1,271. That's 669 cheaper, and you will have paid off the debt 3-months earlier, at 4yrs 9months.

    I might have missed something or miscalculated somewhere, so anyone feel free to correct me...!

    As above, this all, of course, assumes you can get the 2.8% loan...
    • Tozom
    • By Tozom 10th Jul 18, 10:50 PM
    • 40 Posts
    • 0 Thanks
    Tozom
    • #5
    • 10th Jul 18, 10:50 PM
    • #5
    • 10th Jul 18, 10:50 PM
    Thanks for that.. thats along the same lines as i was looking at. Is there another thing to add though, because currently paying 249 a month and on the new loan it could be 203.24 which is a difference of 45.76... aren't I saving that each month for 60mths too?!
    Last edited by Tozom; 10-07-2018 at 10:54 PM.
    • DrEskimo
    • By DrEskimo 10th Jul 18, 11:02 PM
    • 130 Posts
    • 96 Thanks
    DrEskimo
    • #6
    • 10th Jul 18, 11:02 PM
    • #6
    • 10th Jul 18, 11:02 PM
    Thanks for that.. thats along the same lines as i was looking at. Is there another thing to add though, because currently paying 249 a month and on the new loan it could be 203.24 which is a difference of 45.76... aren't I saving that each month for 6mths too?!
    Originally posted by Tozom
    Not quite, you are not saving that monthly difference, you are borrowing it.

    Although you will be saving 46.76 for 48months (48*46.76 = 2,244.48), you are also spending 203 for an additional 12 months more (12*203 = 2438.88), so the net result is it's costing you an extra 194.40, basically the difference in the cost of interest between the 4 and 5-year loan...(there or there abouts anyway...!).
    • foxy-stoat
    • By foxy-stoat 11th Jul 18, 12:04 PM
    • 2,188 Posts
    • 1,186 Thanks
    foxy-stoat
    • #7
    • 11th Jul 18, 12:04 PM
    • #7
    • 11th Jul 18, 12:04 PM
    Ive paid 9 payments of 249x9=2,241 which, if i took that off my original loan amount leaves me with 10,759. To repay the loan early, the balance is 11,377, so the loan if i repay would have cost me the difference of 618... right!?
    Originally posted by Tozom
    Errrrr no, the 9 payments totally 2241 include interest - so you would of paid 1708.46 off the 13,000 capital. Add 2 months of interest for the ERC and you should get to a settlement figure but ask the lender for the figure.

    You will unlikely get the lowest rate loan for debt consolidation though but let us know how you get on.
    • Tozom
    • By Tozom 14th Jul 18, 8:38 AM
    • 40 Posts
    • 0 Thanks
    Tozom
    • #8
    • 14th Jul 18, 8:38 AM
    • #8
    • 14th Jul 18, 8:38 AM
    Errrrr no, the 9 payments totally 2241 include interest - so you would of paid 1708.46 off the 13,000 capital. Add 2 months of interest for the ERC and you should get to a settlement figure but ask the lender for the figure.

    You will unlikely get the lowest rate loan for debt consolidation though but let us know how you get on.
    Originally posted by foxy-stoat
    The 11,377 figure is the one the lender has given already if we pay early by end of Aug. So would my calculation of how much interest I have paid already be accurate?
    • Thrugelmir
    • By Thrugelmir 14th Jul 18, 10:46 AM
    • 59,225 Posts
    • 52,609 Thanks
    Thrugelmir
    • #9
    • 14th Jul 18, 10:46 AM
    • #9
    • 14th Jul 18, 10:46 AM
    Ive paid 9 payments of 249x9=2,241 which, if i took that off my original loan amount leaves me with 10,759. To repay the loan early, the balance is 11,377, so the loan if i repay would have cost me the difference of 618... right!?
    Originally posted by Tozom
    No. As interest is calculated and charged monthly on the outstanding balance. Your assumption is that the interest is spread evenly over the term of the loan. Every month you will pay less interest and more capital as the outstanding balance reduces.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Tozom
    • By Tozom 14th Jul 18, 4:45 PM
    • 40 Posts
    • 0 Thanks
    Tozom
    No. As interest is calculated and charged monthly on the outstanding balance. Your assumption is that the interest is spread evenly over the term of the loan. Every month you will pay less interest and more capital as the outstanding balance reduces.
    Originally posted by Thrugelmir
    HOw can i work out how much the loan would have cost me in interest and fees in that case? The remaining balance figure I gave is what the lender has given to settle early. I don't mind how much of it was fee and ERC, just how much its cost me.
    • DrEskimo
    • By DrEskimo 14th Jul 18, 10:09 PM
    • 130 Posts
    • 96 Thanks
    DrEskimo
    I think the 618 is correct, as it's based on the settlement figure. The 10,749 figure you quoted was incorrect, but I just ignored that...!

    You can use this calculator to check: http://www.financecalcs.co.uk/Calcs/Settlement.php

    Amount paid after 9months = 2,241
    Settlement = 11,376.30

    That totals 13,617.3. Subtract that from the initial amount borrowed (13,000) and you can see you have paid 617.3 in interest if you settled the loan at 9months.

    Have I got that right...?
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