Are front loaded loans disadvantageous? Raging valid?!
Discussion
Just got a loan to clear a PCP and they have slapped ALL the term's interest on the balance at the outset. It looks like they have increased the balance by adding interest that isnt even due yet and are charging me interest on the interest
!? All my previous loans have had the interest added daily based on the actual balance due - very clear!
Now this front loaded interest model all works out fine if you let the loan run its full course, but if you settle early then you will have paid less capital off as you have been servicing a debt PLUS the whole amount of interest upfront?
Lots of people raging at Tesco over this online as, when doing an early settlement, as it feels like they should have cleared more capital, but are they right since there is an early settlement interest rebate. Very hard for a punter to work out.
So my question is are you actually clearing less capital initially compared to an 'interest calculated daily' loan because a lender has front loaded the interest on top of the loan?
!? All my previous loans have had the interest added daily based on the actual balance due - very clear!Now this front loaded interest model all works out fine if you let the loan run its full course, but if you settle early then you will have paid less capital off as you have been servicing a debt PLUS the whole amount of interest upfront?
Lots of people raging at Tesco over this online as, when doing an early settlement, as it feels like they should have cleared more capital, but are they right since there is an early settlement interest rebate. Very hard for a punter to work out.
So my question is are you actually clearing less capital initially compared to an 'interest calculated daily' loan because a lender has front loaded the interest on top of the loan?
Hah - I've had the loan a couple of days! I need to know if clearing it after a year on a front loaded loan will be more disadvantageous to me than it would be on a loan calculated as daily interest? Mix of opinions out there!
Lots of smoke and mirrors with these loans - no breakdowns or calculations shown.
Lots of smoke and mirrors with these loans - no breakdowns or calculations shown.
Thats good to know but their exact blurb reads as:
At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
The way I read it is they are saying they calculate the interest on the whole sum at the start and then divide by the number of months to present to you how they come about the cost.
I think this is the way they have to present loans now, its so customers can see the total cost of the loan. Before the last financial crash they did not have to do this and you could just get told the APR. The actual total cost was not presented or if it was it was in the small print. Now its up top and in bold!
I think this is the way they have to present loans now, its so customers can see the total cost of the loan. Before the last financial crash they did not have to do this and you could just get told the APR. The actual total cost was not presented or if it was it was in the small print. Now its up top and in bold!
Ken Figenus said:
Thats good to know but their exact blurb reads as:
At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
You really are getting this seriously wrong.............you only pay interest on the amount owed, not the amount owed PLUS the interest added.......At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
If you have only had the PCP agreement for a couple of days then you won't be 'settling' - you will be 'withdrawing' from the finance agreement. You'll pay back the capital borrowed, plus a daily interest charge. This will be outlined on your agreement and the finance company will confirm to you the amount to withdraw.
If you've had the PCP agreement for more than 14 days, then you will need to 'settle' - i.e you are out of the 'cooling off' period of the agreement. The finance company will provide you with a settlement figure, which will show the total amount remaining to be paid under the agreement, less a rebate of interest not payable, leaving you with the settlement figure.
This assume the agreement is in an individual's name and not a limited company (i.e. the agreement is regulated by the consumer credit act). All finance companies have to adhere to exactly the same settlement formula when calculating settlements under the consumer credit act.
If you've had the PCP agreement for more than 14 days, then you will need to 'settle' - i.e you are out of the 'cooling off' period of the agreement. The finance company will provide you with a settlement figure, which will show the total amount remaining to be paid under the agreement, less a rebate of interest not payable, leaving you with the settlement figure.
This assume the agreement is in an individual's name and not a limited company (i.e. the agreement is regulated by the consumer credit act). All finance companies have to adhere to exactly the same settlement formula when calculating settlements under the consumer credit act.
rfoster said:
If you have only had the PCP agreement for a couple of days then you won't be 'settling' - you will be 'withdrawing' from the finance agreement. You'll pay back the capital borrowed, plus a daily interest charge. This will be outlined on your agreement and the finance company will confirm to you the amount to withdraw.
If you've had the PCP agreement for more than 14 days, then you will need to 'settle' - i.e you are out of the 'cooling off' period of the agreement. The finance company will provide you with a settlement figure, which will show the total amount remaining to be paid under the agreement, less a rebate of interest not payable, leaving you with the settlement figure.
This assume the agreement is in an individual's name and not a limited company (i.e. the agreement is regulated by the consumer credit act). All finance companies have to adhere to exactly the same settlement formula when calculating settlements under the consumer credit act.
Richard,If you've had the PCP agreement for more than 14 days, then you will need to 'settle' - i.e you are out of the 'cooling off' period of the agreement. The finance company will provide you with a settlement figure, which will show the total amount remaining to be paid under the agreement, less a rebate of interest not payable, leaving you with the settlement figure.
This assume the agreement is in an individual's name and not a limited company (i.e. the agreement is regulated by the consumer credit act). All finance companies have to adhere to exactly the same settlement formula when calculating settlements under the consumer credit act.
he's talking about the Tesco unsecured loan he's taken out to pay off a PCP
Ken Figenus said:
Thats good to know but their exact blurb reads as:
At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
They have to do that otherwise your monthly payments would be forever changing. At the beginning of the loan we work out the interest you will pay over the whole length of your loan and add this to your loan amount. We calculate your interest charge by applying interest at a monthly rate based on the APR to the balance of your loan, as reduced by your monthly repayments. We add this to the loan amount and then divide this total by the number of monthly repayments.
They ADD the total interest due to the total amount borrowed at the outset thus effectively increasing the amount borrowed?. So each monthly payment not only includes the interest due on the capital balance but also now on the total interest figure. Its like compound interest in reverse?
I must be missing something as if this front loaded thing is true it seems very dodgy to charge interest on interest?
Ken Figenus said:
Thanks guys, its clear they totally succeeded in confusing me with that wording of "interest you will pay over the whole length of your loan is added to your loan amount"; their intention may have been the opposite! Terrible clarity
loan amount = xinterest = y
interest you will pay over the whole length of your loan is added to your loan amount = x+y
Couldn't be easier.
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