Can a creditor charge more interest at the start of the repayment period?

[TsunamiOfShit]

I took out a loan with a credit union. My credit history isn't great so couldn't get a great rate and this was the best loan I could get.

APR was 36%. Not great, I know, but my intention was and still is to pay this loan off early and therefore not ending up paying as much interest. I asked about this before I took a loan out and they said it was no problem paying it back early.

However, we are 6 months down the line and I have just looked at my statement. The amount of interest I have paid some close to the amount of actual repayments!

I pay them £170 per month. The first payment was £81 repayment and £89 interest, second repayment was £91 repayment and £79 interest, third repayment was £89 repayment and £81 interest. And so on.

I'm no maths genius, but this does not look like 36% APR? Are they allowed to start with high interest and then reduce it to average it out?

This means that by the time I can pay the loan back early, I won't have made the same dent in the balance I thought I would have?

I have just gone over the loan agreement and nowhere does it say they'd do this, they are just telling me the total loan amount, total amount repayable and total interest over the course of the loan. Nowhere does it say that I'd be paying as much interest as repayment the first year...

They are using the "sum of the digits" method to split capital and interest.
Its the same way that repayment mortgages are calculated.
You are charged interest based on the amount outstanding
so as time goes by your repayment stays the same but the amount of capital you are paying rises.

Nasty but perfectly legal.

36% is an eye watering rate - every penny you can pay early will save you substantial amounts of interest.

It's standard. The interest on the full amount at the start is more than when you have nearly paid it off.

This is the way most repayment mortgages and many bank loans work, in the early days when the debt is high, much more of your monthly repayment is interest. As the debt reduces, the proportion of interest to capital repayment decreases.

That is normal. At the beginning, you had to pay interest in the whole loan (L). In month 2, you had to pay interest on L - £81. In month 3, L - 172, in month 4, L - £261, etc.

Also 'the sum of the digits' method means that they take the number of months that your loan is spread over, and weight the interest so that it's top heavy. If your loan was a 12 month loan, then the first month would be 12/78ths of the interest, the second month 11/78ths, third 10/78th of the interest, fourth 9/78ths, and so on, until your last payment was almost all repayment of the loan, and only 1/78th of the interest.

Thank you very much for your replies.

Yes this is completely normal

You have more of their money in the first month, hence more interest. In the second month because you paid some of it back last month you don't need to pay quite as much interest, so more of the money is the actual loan.

Are there penalties if you repay the loan early? We can overpay our mortgage by 10% without penalty. If you overpay one month, then all the extra money you have paid will be taken off the loan amount because you have already paid the interest for that month. That means that the next month there will be less interest (as the loan amount has decreased) and so more of the repayment will be the loan.