Individual Customer

The effects of overpayments on loans

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?

If your agreement is regulated, you can reduce the total interest you pay on your loan, saving you money in the long run.

How to make overpayments?

If you want to make overpayments on your loan, you should first check the terms and conditions of your loan agreement. Some loans may have restrictions or charges for making overpayments, such as prepayment penalties or early repayment fees. This is particularly the case when your loan is unregulated. You should also consider your budget and financial goals before deciding how much and how often to pay extra on your loan.
If you decide to make overpayments, you can contact the lender by phone, email, or online to arrange the payment. You can also set up a direct debit or standing order from your bank account to automatically make overpayments on your loan. You can sometimes specify whether you want the overpayments to reduce the term of your loan or the monthly payments, or let the lender allocate them according to their policy, depending on the particular policy of the lender. You can also change or cancel your overpayments at any time, subject to the terms and conditions of your loan.

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