Author Topic: Loan Interest Question  (Read 3041 times)

GordonCopestake

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Loan Interest Question
« on: October 17, 2014, 01:15:34 PM »
I have a personal loan (a mistake from before I found MMM!). I was looking at how much I can afford to over pay the loan to get rid of it as quickly as possible to reduce my interest charges but I saw something that I hadn't really noticed before in that they have charged the whole terms interest up front. I've attached a copy of my statement so you can see what I mean.

As they have ALREADY charged me the interest it seems to me there is no point in paying the loan off early (other than to get rid of it) and my money would be better spent elsewhere.

Can someone give me a sanity check and ensure my thinking is right?

Cheddar Stacker

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Re: Loan Interest Question
« Reply #1 on: October 17, 2014, 01:28:15 PM »
The interest charge appears to be the interest of 7.1% charged/amortized over the life of the loan. I would call and discuss it with someone to ensure you're not missing something.

If that's the case, the only reason to pay it off early would be to reduce your monthly cash outflow. Not good.

whydavid

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Re: Loan Interest Question
« Reply #2 on: October 17, 2014, 02:02:25 PM »
The interest charge appears to be the interest of 7.1% charged/amortized over the life of the loan. I would call and discuss it with someone to ensure you're not missing something.

If that's the case, the only reason to pay it off early would be to reduce your monthly cash outflow. Not good.

Seconded.  And I would review the terms of the loan to see if this was included in the initial terms.  Probably was, but can't hurt to check.

marty998

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Re: Loan Interest Question
« Reply #3 on: October 18, 2014, 07:03:34 AM »
Hmm, I've never seen this before either.

Very odd.What happens if you pay off the balance tomorrow?

retired?

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Re: Loan Interest Question
« Reply #4 on: October 18, 2014, 08:31:38 AM »
So, the interest line is the total interest you'd pay if you made 48 regular payments.  i.e. if no pre-payments, then fine, although still unusual to be written that way.

What it reminds me of is my home mortgage with Wells Fargo.  If I paid more than the regular P&I payment, on say Nov 1, rather than immediately reducing my principle, they applied the extra to the payment due on Dec 1 and if my prepayment was enough, keep pushing it out. 

I had to call twice to get them to recognize the timing of the payment.  Prepaying is quite common these days, it was surprising that a firm like WF would assume people were just paying a later payment a little early.  The default should be as a prepay.

That said, look up the agreement to see if no prepays are allowed and call them.  They could simply be doing something along the lines of WF......basically trying to screw you a little.

I see it is in GBP's.  In the U.S. not allowing prepayments or having prepayment penalties is highly discouraged, with the main market being mortgages (Fannie and Freddie will not buy mortgages that do this). 

GordonCopestake

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Re: Loan Interest Question
« Reply #5 on: October 18, 2014, 08:41:21 AM »
Thanks for all your replies guys.

I have spoken to them and set up a regularly overpayment to get rid of the loan as quickly as possible, but the interest is fixed :- it's the whole terms interest as per the statement. Not really ideal but a lesson to read the small print.

retired?

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Re: Loan Interest Question
« Reply #6 on: October 18, 2014, 10:30:21 AM »
OK.  So, given the total dollars paid are fixed, regardless of the timing, then you'd pay this off slowly if you have any other debts.

This advice is counter to the usual advice which is to pay off the highest rate debt first.  Paying this loan off early has absolutely zero financial value (may make you feel better). 

Since you cannot adjust the total payments (principle and interest) to them, you want to delay as long as possible, which is equal payments.

Since your goal was to reduce your interest charges and you cannot do that, then make payments that are the least valuable to the bank.  I hope this is clear, but the lender would love for you to prepay in this case.  They would have loved for you to prepay immediately.  Their "work" was done the day you signed the loan.

GordonCopestake

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Re: Loan Interest Question
« Reply #7 on: October 18, 2014, 11:07:20 AM »
Retired,
Thanks for your very clear description.

Despite not gaining anything, I'm still going to overpay the loan however as I will feel better when it's behind me and it's my only debt before my mortgage,  I can then concentrate on more positive things.

Thanks for everyone's insights

Gordon
« Last Edit: October 18, 2014, 11:09:31 AM by GordonCopestake »