Personal loan, early repayment

One · 31 Jul 2015 at 13:15

The more you borrow, the lower the apr. If I want a 3k loan, it's at least 8%. If I get a 7k loan then this can be as low as 4%.

What's to stop me taking out the larger loan with the better apr and then making a 4k partial repayment and essentially having a 3k loan at 4%?

SixTwoSix · 31 Jul 2015 at 13:15

Early repayment penalties.

Salsa · 31 Jul 2015 at 13:19

There will probably be early repayment fees which will make this uneconomical.

/Salsa

muon · 31 Jul 2015 at 13:20

There are penalties which you can have of up to 58 days interest. If it is small enough, sometimes overpayments don't attract penalties.

But you are right, it can often work out cheaper, even with fees.

DominicStar · 31 Jul 2015 at 13:20

SixTwoSix said:
Early repayment penalties.

Will that wipe out any gain though? I recently paid off £2k of a £4k loan balance and when I requested a settlement figure a few weeks later, the only interest penalty was the 28 days statutory interest on the £2k balance to the redemption date.

muon · 31 Jul 2015 at 13:21

If it is a long loan, then the fee of 58 days interest isn't that bad.

A 4% to 8% gap is worth more over a longer term.

greyfox591 · 1 Aug 2015 at 06:32

I took out a £3000 loan a few months back and paid it back a couple of weeks later but I'm still paying back the APR for the 24 month loan term

Greebo · 1 Aug 2015 at 07:52

Check small print. Some loans might be a month or two interest.

Edit. I am out of touch. There are max limits of 2 months interest and it might be less. Full details here.

http://www.choose.net/money/guide/faqs/right-make-personal-loan-repayments.html

Of course depends on term of loan as to how much you save. Doing what you suggested on a 3 year loan would have a bigger affect than on a one year loan. By the time you have sorted it and paid the extra back and incurred two months interest you would have paid interest on the higher Moutn for 3 months of the year so only have lower interest for 9 months.

AtticusFinch · 1 Aug 2015 at 07:56

Try and borrow from a bank if you can. It will be very unlikely they will charge you an early repayment fee.

PapaLazaru · 1 Aug 2015 at 08:07

Not a good idea on a fixed term loan. There will be penalties of which the main one is that on most loans the interest is added at the start of the loan, so let's say I the interest was £500 on a £7k loan, if you part pay off £4k immediately, you will still owe £3.5k.

You need a flexible loan though the rates are higher.

Greebo · 1 Aug 2015 at 08:11

Thought rules had changed and that no longer applied?

AtticusFinch · 1 Aug 2015 at 08:13

Not so for bank loans

PapaLazaru said:
Not a good idea on a fixed term loan. There will be penalties of which the main one is that on most loans the interest is added at the start of the loan, so let's say I the interest was £500 on a £7k loan, if you part pay off £4k immediately, you will still owe £3.5k.

You need a flexible loan though the rates are higher.

Generally these features will not apply to personal loans from a bank.

You can repay any amount at any time with no penalty whatsoever.

When you make an early repayment, it is a repayment of capital only and you will not be charged the interest in respect of the amount repaid.

Crappy lenders may have all sorts of arrangements, so try to avoid.

Regulated lending is a lot less expensive now that the FCA regulates consumer credit.

[FnG]magnolia · 1 Aug 2015 at 08:14

One said:
The more you borrow, the lower the apr. If I want a 3k loan, it's at least 8%. If I get a 7k loan then this can be as low as 4%.

What's to stop me taking out the larger loan with the better apr and then making a 4k partial repayment and essentially having a 3k loan at 4%?

Read the terms you signed up to. For s super bonus extra prize, understand what they mean!

You're welcome.

[TW]Fox · 1 Aug 2015 at 09:44

PapaLazaru said:
Not a good idea on a fixed term loan. There will be penalties of which the main one is that on most loans the interest is added at the start of the loan

Totally false. This is unlawful. Why post that?

muon · 1 Aug 2015 at 10:06

We can work out the penalty very easily. It is up to 58 days interest, so let's say 2 months (can be less).

Assuming 24 month loan:

£3k at 7.9% = £3244.15.

£3k at 3.9% = £3121.21.
+
£4k at 3.9% for 2 months = £25.59.

So it works out a lot cheaper. If it is a 36 month loan it is even cheaper and so on.

PapaLazaru · 1 Aug 2015 at 10:30

[TW]Fox;28386993 said:
Totally false. This is unlawful. Why post that?

Because some companies have done this in the recent past.

[TW]Fox · 1 Aug 2015 at 10:38

PapaLazaru said:
Because some companies have done this in the recent past.

No companies have done this since the law changed over 4 years ago!

muon · 1 Aug 2015 at 10:49

PapaLazaru said:
Because some companies have done this in the recent past.

No they don't do that.

What they show is the total amount payable which is

monthly repayment x number of months.

That is not the same as adding interest at the beginning of the policy. Imagine trying to settle a mortgage if you applied that nonsensical logic.

Any settlement then should show what you have saved in interest, they tend to call it a discount of some sort.

If by recent past you mean before 2005.

http://www.legislation.gov.uk/uksi/2004/1483/contents/made

Section 5a says the debtor must give 28 days notice and section 6 says the lender can further defer settlement for 30 days.

PapaLazaru · 1 Aug 2015 at 10:51

[TW]Fox;28387146 said:
No companies have done this since the law changed over 4 years ago!

Well if it changed four years ago then my advice is incorrect. Thanks for pointing it out. Got stung myself by it so glad it has changed.

muon · 1 Aug 2015 at 11:02

PapaLazaru said:
Well if it changed four years ago then my advice is incorrect. Thanks for pointing it out. Got stung myself by it so glad it has changed.

Way more than 4 years ago.

In fact an EU directive in 2010 limits compensatory charges to 1% of outstanding amount, but obviously UK CCA amount is actually lower than that.

http://www.legislation.gov.uk/uksi/2010/1010/contents/made