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Credit > Loans > Loan Information > Basics - Part 2
In our previous example of £1000 borrowed for a year at an interest rate of 7.5%, increasing your monthly payment by £10 a month will save over £4 in interest. I know you're thinking that doesn't sound like a lot, but its actually almost 10% of the interest paid. For loans of higher amounts that are paid back over longer periods you will notice the effect even more.
The effect is so pronounced because of the way interest is calculated. If you pay off a bit extra the first month, its a little bit less that you won't be accruing interest on for months to come. Even if you only made your standard payment for the following months you would still be paying more off the balance every month because of the reduced amount of interest you're paying.
Some loans may also have a pre-payment penalty. This may be in effect for an initial period or it could be for the complete length of your loan. A pre-payment penalty means that you would have to pay a fee for paying off your loan before the due date. In such a case, you should calculate if you are better off paying the penalty and saving on interest or just carrying on paying as normal.
Another thing to look for in the terms and conditions of any loan you take out is if the loan issuer can take funds from other accounts if you fail to make payments. This can apply to both secured and unsecured loans. If you have say a savings account with the same bank you have your loan with and you fail to make payments on your loan, the bank may be entitled to recover money from your savings account to pay for the loan. This may be the case even if the other account is jointly held with someone else. Check in your loan terms to see if this could apply to you.
Loan Basics - Part 2
Making Extra Payments
Making extra, or higher payments to your loan can save a surprising amount of money in interest.In our previous example of £1000 borrowed for a year at an interest rate of 7.5%, increasing your monthly payment by £10 a month will save over £4 in interest. I know you're thinking that doesn't sound like a lot, but its actually almost 10% of the interest paid. For loans of higher amounts that are paid back over longer periods you will notice the effect even more.
The effect is so pronounced because of the way interest is calculated. If you pay off a bit extra the first month, its a little bit less that you won't be accruing interest on for months to come. Even if you only made your standard payment for the following months you would still be paying more off the balance every month because of the reduced amount of interest you're paying.
Things to beware of
The most obvious thing to beware of is that you should only make the extra payments if you can afford them. With most loans you will still have to make the standard payment the following month even if you pay more on previous months. Other loans count any extra payments towards future monthly payments so paying more early on could mean you could in effect take a "payment holiday". Check with your loan's terms to see how extra payments are applied to your loan.Some loans may also have a pre-payment penalty. This may be in effect for an initial period or it could be for the complete length of your loan. A pre-payment penalty means that you would have to pay a fee for paying off your loan before the due date. In such a case, you should calculate if you are better off paying the penalty and saving on interest or just carrying on paying as normal.
Secured Loans
If you decide to take out a secured loan there are some extra things to be aware of. With this type of loan, you use some property as security for the loan. In most cases, this will be your home. You have probably heard the phrase on TV adverts "Your home may be at risk if you do not keep up repayments", and this is exactly what you should be aware of. Whenever you use something as security for a loan you risk it being repossessed if you fail to make repayments on your loan.Another thing to look for in the terms and conditions of any loan you take out is if the loan issuer can take funds from other accounts if you fail to make payments. This can apply to both secured and unsecured loans. If you have say a savings account with the same bank you have your loan with and you fail to make payments on your loan, the bank may be entitled to recover money from your savings account to pay for the loan. This may be the case even if the other account is jointly held with someone else. Check in your loan terms to see if this could apply to you.
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