A guide for customers of Creative™
What are overpayments?
Overpayments are any payments you make on your loan that are more than the minimum amount due each month.
On regulated agreements you can choose to make overpayments regularly, such as every month or every quarter, or occasionally, such as when you receive a bonus or a tax refund.
Why would I make overpayments?
- In some cases, you can shorten the term of your loan, meaning you can pay it off sooner and free up your cash flow. This will vary by lender – some lenders would prefer to reduce the monthly payment instead.
- You can avoid or reduce fees or penalties that may apply if you miss a payment or default on your loan.
- You can build equity in your vehicle if your loan is secured on it, giving you more financial security and flexibility.
How to make overpayments?
In the case of regulated loans
The repayment schedule is for the amount borrowed and the interest. Each repayment is therefore made up of capital and interest. However the proportion of capital and interest will vary every month and in the early part of the agreement the outstanding capital normally reduces very slowly. This will be why in the first six months of any agreement the customer may notice that the balance is perhaps more than they might otherwise have expected and may not see the value of a full settlement in the first few months. This is a decision for the borrower to make in concert with their financial advisor.
As the broker we can only refer the customer to the lender to give them a precise breakdown of settlement charges, and reassure them that these calculations are set by statute using the actuarial method, so the lenders have very little discretion over it at the point of calculation. The actuarial method is an extremely complicated calculation which is beyond our expertise as brokers to calculate on your behalf and contractually we can make no representations on behalf of the lender.
This useful link explains the situation in respect of regulated loans:
https://www.specialistautomotivefinance.org.uk/resources/early-settlement.html/
This is a highly compliant area and parties have to work to very tight rules and regulations. The explanations provided to you by the lender in their precontract information may well discharge their responsibility to explain this to you if the precise settlement date and other conditional elements are as yet unknown.
You can overpay without penalty up to £8k per annum but if you overpay pay more than that you will likely pay 1% on the total overpayment, or 0.5% if it is in the last year.
So the following overpayments would be calculated thus:
£8000 in year 4 of 5 year agreement no penalty
£8000 in year 5 of 5 year agreement no penalty
£8001 in year 4 of 5 year agreement 1% penalty = £80.01
£8001 in year 5 of of 5 year agreement 0.5% penalty =£40.00