Early repayment of loan.

[Cymru_Cowboy]

I have just applied for a loan of 10,500 with Northen Rock over a 10 year period. I have not signed any aggreement yet. Today I phoned to ask about early repayment of the loan ( I intend to pay it back in approx. 6 months as i'm just looking for a way to consolidate and reduce my monthly out goings until my divorce has been settled) I was told that if i were to pay back in 6 months it was likely that i would have to pay around 14-15,000 back as it was front loaded interest loan. I was taken aback as i expected to pay around the same as i borrowed in the first place. I realised i would pay the interest on monthly payments for the next 6 months, but is it standard that i would have to pay that much back to settle a loan early? Any advice would be much appreciated.

[stevie21]

I'd imagine that many loan companies have this policy of front loading interest to guard against lucky folk with money such as yourself.
If you are guaranteed this income in 6 months and it's just a matter of time then my bank would consider giving you the money as an overdraft which would be repaid in 6 months.
You'd pay interest on that obviously, but not thousands of pounds.

Are you able to apply for a couple of credit cards and pay the minimum for 6 months? Even that'd be cheaper than NRock.

[Cymru_Cowboy]

The Bank wont do this as an overdraft as it i'm not gauranteed this income, its dependant on a house sale as part of the divorce settlement, and the reason i'm taking a loan is to consolidate store/creditcards and overdraft that the monthly repayments are currently too high on as i'm trying to pay solicitors fees etc. But thanks anyway stevie.

[Oneeyedvic]

If it is a 'regulated' (and by that I mean regulated under the Consumer Credit Act) agreement, which if it is unsecured it probably will be, there is a formula called the 'rule of 78's' which must be (by law) used to calculate the interest charges. The amount quoted is far too high, and is probably a 'guesstimate'.

On agreements over 5 years, it is approximately one months interest charges that they can charge you.

If on the other hand it is a 'secured' loan (on property by way of first or second charge), they can charge you whatever they want.

On rereading the question, and basing my 'guess' on the fact that its Northern rock and a 10 year period, it occurs to me that it is probably a secured loan......

If it is any better, you could go to a loan company and ask for a loan with no early redemption penalties. The payments will proabaly be higher, but you won't get loads of interest when you do pay off.

[Oneeyedvic]

after reading your follow up question to Stevies advice - you could potentially ask for a bridging loan (if there is enough equity). This would roll up the interest so that you wouldn't have to pay any monthly figure. Expensive way to go, but may be worth it in the short term.

[Loosehead]

Rule of 78 is illigal, perhaps they are using some other form of front loading. Don't touch it with a bargepole. Get a loan from one of the many who do not charge early repayment. I know for example that LTSB, all loans just charge the interest for the number of days the money is borrowed, I have no connection by the way. There are mant cheaper, Cahoot online for example offer < 7%

[Mrs_Pegasus]

Hi There

Just to add that 10 years is a long time to ask for a personal unsecured loan for and this may well be another reason that you will incur such high repayment charges.

Cant you take a lower repayment period.  The standard always used to be 5 years but I know some banks will consider 7 years.