Loan early redemption fees

[DeanR32]

Morning PH

I’m looking to get a loan in the next few days. It’s not any massive amount, and I intend to pay it off with a chunk in a years time.

Do early redemption charges vary by length of the loan? Instead of getting it over, say 2 years, would I be better to pay it over 5 years, knowing full well I won’t be going the full term, or will they penalise me over the amount of years the loan is over?

Sorry for all the questions but I’d like to know before I start applying for said loan

Cheers

[anonymous-user]

Any redemption fees should be clearly stated by the lender - just ask.

The main point to bear in mind is with a loan you are paying interest and repaying capital. The early months/years are mainly interest - so if you repay early you will still have a large amount of capital to repay. Example: loan over 60 months. If the loan ran for the full 60 months you would pay X interest and Y capital which = Z in total. Each month you are paying 1/60th of Z but this is NOT 1/60th of X and 1/60th of Y.

Apologies if you already knew this - it is something many people don't realise though!

[p4cks]

Yep - the loan balance will be made up of the loan amount + interest, meaning it's front loaded. That'll be your redemption figure. Also, not many lenders have redemption fees but if they do it'll be something like a £25 admin fee or the like, but it's always worth checking with the lender.

[DeanR32]

Thanks for the replies guys

I applied for a loan with my bank this afternoon, which didn’t have the best rate, but thought I’d keep everything in one place.

I must be a massive risk because it went from 3.4 to 9.9% (subject to underwriters approval). Not sure if my rating is good or bad (Noddle says it’s 665 whatever that means) I don’t have anything bought on credit and have one credit card that clears itself monthly.

Anyone know why Experian reckon my rate has to be 9.9%, or is it all a crock of st? Who the hell gets their best rates???

[James2593]

Depends entirely on the lender. I loaned £10k with Halifax for 3 years with the intention of paying it off after a few months. A good read of the T+Cs ensured I would pay a pro rata daily interest with a min of 56 days. No early payoff fee, just the interest.

[DeanR32]

I did ask them about penalties, and they did say there’d be a maximum 2 months penalty. I didn’t expect the rate to jump so high though. I’m not sure how it all works.

Should I expect every lender who uses Experian to bump the rate up so drastically now?

[Jockman]

They only have to give the headline rate to 51% of borrowers. Thereafter they can hide behind their lending criteria.

This could be a useful read for you...

http://forums.moneysavingexpert.com/showthread.php...

[Basil Hume]

I had a bit of an epiphany last year and have since been over-paying a loan at a monthly rate of about 170% compared to the agreement. (I make two monthly payments: the agreed amount and then an overpayment.)

If you pay a personal loan off in one go, then the lender is usually able to charge a fee of 60 days' interest. I'm not sure how they handle partial overpayments like mine, but I do know that I will save a good amount of interest.

I am also overpaying my mortgage, although that is limited to 10% of the outstanding balance. I have found that there are fewer restrictions for overpaying a personal loan.

In hindsight, the return from equities (which I also drip-feed on a monthly basis) or additional pension contributions might have been greater than my overpaying the loan and mortgage. However, I've managed to reduce the combined debt balance by 26% in the last 12 months - and it'll be down to four figures in under 18 months at this rate.

[nw942]

Take a look on uSwitch or any of the comparison sites to find out who gives the best rates. I also noticed that some lenders charger a higher rate for smaller loans e.g. the HSBC example calculator offers 18.1% below £5000 and 6.1% over £5000.

I think the trick when you pay it off is to do one of two things. Either make sure the final lump sum you pay off leaves a balance equal to your monthly payment still outstanding. That payment will then be taken and the loan fully repaid without incurring any 58 day penalty fees. The alternative is to pay off all but £1 and then ask for a settlement figure on the remaining balance. 58 days interest on £1 won't be much

If you do pay it off before the original term, they also have to recalculate the interest and so you may find a payment for 'overpaid' interest in your current account. If you play around with this calculator you can see a breakdown of interest and capital figures quite nicely: https://www.thecalculatorsite.com/finance/calculat...