Knowing Your Loan Penalties
Knowledge is power…
It’s quite easy to find a loan these days. Whatever you want it for, you will undoubtedly find a company willing to lend you the money, even if you have CCJ’s or bad a credit rating. When you’re shopping for a loan you will of course be looking at the interest rates and comparing them to get the cheapest rather than settling for the first one you see.
But what about those charges that occur when things don’t go quite right for you? How much do lenders charge for late payments, missed payments, or if you have to default altogether? And what about when things do go right for you and you want to pay off that loan early? Will it cost you the earth?
Paying off early to save money
Does your loan company charge you a fee if you want to pay off your loan early? The chances are it will and the chances are you didn’t know about it because you haven’t read the small print.
Nearly three quarters of loan companies actually charge a penalty if their customers want to pay the loan off before the end of the agreed period. Research has shown that most of the lenders will charge the equivalent of two months interest. Quite which two months they base that on is unclear as the way in which lenders calculate interest and apply it to your account was originally the idea of somebody who was either a genius or a lunatic.
Make money
In order to make sure the lender makes as much money as possible the early payments of your loan will contain a higher percentage of interest than the payments as you approach the loan end. These later payments will be more effectively reducing the actual capital sum that you borrowed.
This makes calculating how much remains as your settlement figure extremely difficult. Why do they do this? Because the lenders know that you are likely to want to pay off the loan before it is completed, and they want to make sure they make their money from you before you settle. And just because they charge a settlement fee doesn’t mean to say they haven’t also weighted the repayments this way.
The Department of Trade and Industry is looking into whether this practice should continue or not. There is a chance they may find in favour of the consumer. In the meantime though, just make sure you check all the small print.
Mortgages
Mortgage loan companies are guilty of the same practice too. It has become ever easier to change mortgages and in a bid to stop the practice of customers swapping from one to the other, mortgage companies are levying increasingly larger fees; some charge up to £300 in penalties for ending your mortgage.
Credit Cards
Credit card companies are guilty of other types of penalties, especially if you are late paying. These fees are probably more to do with the administration of the loan, given that you are allowed to pay back the debt with a huge amount of freedom. This is in contrast to personal loans or mortgages that insist on payment by direct debit. Penalties exacted by credit card companies are usually in the order of £20 to £30 for late payment, which is far in excess of what it actually costs the lender to administer that late payment.
If you do find yourself being charged for a late payment as a result of a genuine error on your part then do contact the credit card company and see if they will refund part of the fee. Most will. They will also suggest that you then set up a direct debit to pay the card each month. And that is not a bad idea, especially if this is not your first penalty for late payment!
More Information:
External Links:
- Loan penalties – an article from UK Loan Store
- Loan information from Money Made Clear
- Council of mortgage lenders
- Early Redemption Penalties – What are they?
Many mortgages will be without early redemption penalties and these will be a wise option for people who feel there is a possibility that they will want to repay their loan early