Loan interest

[Witchbitch20]

If a loan is taken out with the following interest rates/length etc -

“You could borrow £10,000 over 48 months with 48 monthly repayments of £235.86. Total amount repayable will be £11,321.28. Representative 6.4% APR, annual interest rate (fixed) 6.22%”

What would you expect the monthly interest rate to be? Approximately.

My niece has taken out a loan (as detailed), repayment was to begin 1/1/23.

For December she was charged £15 interest. For January £50 interest. She has overpaid £700 to reduce the owed amount (the loan allows for additional payments to be made) so she’s used her work bonus to pay off some extra and was planning on doing this each month.

Whilst she can comfortably afford the £235.86 a month, she’s getting stressed about the fluctuating interest charge as she believes she took out a fixed rate loan.

I have offered to give her the money to pay off the loan and she can repay me the monthly amount until she’s cleared the debt (obviously saving her interest). She’s reluctant to do this but asked me for my opinion on the interest rate. Other than advise her to speak to the bank I’m a bit stumped - other than one mortgage I’ve never taken out a loan so not familiar with interest calculations.

Just wondered if anyone could give some rough calculations?

I have a loan and all the interest was added on when I took it out. If I paid it off now u would get a rebate. If I overpaid it I don't think the interest would go down until it was paid off.

When did she take the loan out? £50 interest is probably right. £15 sounds like a part month. Normally extra repayments come off the length of the loan. I'd wait and see what happens next month or contact them and ask

@teaandtoastwithmarmite thanks, yes I think that’s what she was expecting. When she made the overpayment she got a statement saying she’d “saved £136 in interest” but I think she’s disheartened because she took the borrowing down from 10,000 to 9500 and then on the first it went up to 9550 (she made another overpayment at this point).

I’m a bit lost with it all - I’d have loaned her the money if she’d mentioned it before, but I think she wants to be independent.

The only other thing I could think off is that the repayment didn’t come out of her account on 1st (bank holiday), and has only been debited today - so I wondered if that had caused a higher interest charge?

I guess she either needs to talk directly to the bank, or wait to see what happens next month. She’s made 3 additional payments totalling 715 so perhaps that’s also causing a problem.

Does the interest part change monthly depending on the loan amount creating the interest? For example, £15 for December is a part month, £50 for jan and the. A decreasing amount thereafter?

Thank you @helpfulperson !

I think end of November early December - so part month makes sense. I know she had it set up that the first DD was paid this month.

Thank you for your help. I hate seeing her getting stressed.

The first thing you screenshot looks like what the bank could offer her. Does she not have a proper breakdown of the monthly payment and interest rate as it could differ from the offer once they check with credit reference agencies.

What interest rate did she get?

It might be worth taking one out with first Direct which normally have fairly low interest loans and paying this original one off early if allowed although that depends on her credit rating I guess. With my first direct loans I took out for house renovations The interest is on the amount I can see next to my current account and does not change. The entire balance decreases as I pay it back and if I pay it back early they recalculate how much I owe (or repay me anything I've over paid). I always take my loan out for the longest length of time available but make over payments.

@dementedpixie hi, no that is the amount she has borrowed, the monthly repayment and interest rate.

I think given the other responses it makes sense that the December interest rate was part month - it hadn’t occurred to me when she was here earlier.

I think she might also be being a little too eager in seeing the loan reduce and it’s not happening quickly enough for her.

She knows I’ll give help if needs. I think she’s panicked that she’s taken a fluctuating loan rather than a fixed rate - but I definitely don’t think that is the case from what I saw.

I think I would save the money and pay it a lump sum when she had enough to pay it off.

So mine shows a certain amount I could settle with now and the interest if receive back.

Honestly I've had a number of loans and can never work out the interest rates. It does get confusing when there are additional payments. But it does work out.

Thank you @helpfulperson !

Yes after reading all the responses it does make sense to me now. When she visited earlier in the day the loan repayment hadn’t been taken from her account but by the time she’s left work the direct debit has gone out. It’s for the set amount she was expecting.

She’s generally quite anxious and cautious over finances so I was surprised she’d taken out a loan anyway. I adore her but I’m the worst person to ask about things like this! Her Mum’s a bit of a tyrant so she’ll come to me first. I think I can more confidently say now it will be fine. Might just also tell her to stick to the payment schedule for at least a few months and just make additional payments at the end of each year or something.

Thank you everyone.

She needs to read the terms of what she has borrowed - silly her. Never ever ever take out a loan without knowing EXACTLY what the repayment terms and conditions are. If she knew them she wouldn't need to panic wondering if the interest rate was fixed or variable.

No, don't tell her not to overpay till the end of the year - she should overpay as soon as she can, to minimise interest on the remaining capital. She should of course make sure overpayments are treated as coming off the balance, not as advanced repayments.

Sounds like both of you need some financial sense! Start reading Money Supermarket.

I think quite a few people get a shock seeing how much of what they pay is interest in the earlier months of a loan. It starts being a big chunk of the monthly payment but will reduce as the loan gets closer to being paid off.

I had a shock today when I was looking at my loan repayments. I've paid over £1000 off my loan yet when looking at what I still owe it looks like I've only paid £200 off it. My DH says it's because they take the interest 1st so once that's paid I'll notice the loan coming down.

Where did she get the loan from? If it was a major bank and a standard loan, so not subprime, she doesn't need to worry about the interest amounts on the statement, she will pay the agreed amount as stated if the loan runs its course, - it often looks a little different in the first month due to interest being charged for a part month.

@BarbaraofSeville Lloyds Bank. She’s just looked at a statement got herself into a flap and panicked.

Everyone here has been helpful though so I can ring her tomorrow and all will be fine.
Yes @messyismymiddlename i think she’s just done exactly the same thing - was expecting it to have reduced much more and then got into a tizz.

Unfortunately @tizzy neither I or my niece are perfect. You only know the bits I’ve posted here but quick to judge a stranger asking for help. Her first loan, and as I already mentioned not something I’ve ever needed so I’m not familiar with things. Might check if my local colleges do sound financial planning corses - although as I also tried to explain she did research and panicked because the DD hadn’t gone out as she expected and the amount paid off in a matter of six weeks hadn’t reduced as much as she thought.
I think I’d rather she has a panic and comes to ask for help rather than worrying and causing unnecessary angst.

Within 2 hours lots of helpful advice provided so I can see what the issue was.

Thanks all.

If I look at my mortgage online the payment is made at the start of the month but they add interest at the end. So for example balance on 1 jan would be 100,000, payment made of 1000 then shows balance of 99,000 but on the 31st when the interest is added it will say 99,100 before dropping down to 98,100 when the next payment is made

Interest is also charged daily so varies month to month.

Definitely overpay where you can, it saves £££ on internet over the term of the loan. If you're going to overpay it's better to do it at the beginning when the interest is higher and the majority of your monthly payment goes to interest, hence the balance you owe remaining quite high.