A guide for customers of Creative™
Common Misconception
Some customers believe that taking out a long-term loan and settling early (for example, after one year) will save money because they expect a rebate of interest.
While you may receive a rebate, the interest charged during the first year of a 15-year loan is not the same
as the interest on a 12-month loan.
Why Does This Happen?
Interest from the start
- Most loans use an amortization schedule where interest is calculated on the outstanding balance. In the early months, a larger portion of your payment goes toward interest because your monthly payment stays the same but the amount you owe reduces.
- Longer terms = slower principal reduction: With a 15-year loan, your monthly payments are smaller, so your balance decreases more slowly. This means you pay more interest in the first year compared to just a short-term loan.
Example
Loan Amount: £10,000 | Annual Rate: 8%
12-Month Loan: Interest paid in first year = £438.61
15-Year Loan (settled after 1 year): Interest paid in first year = £787.00
Key Takeaways
Before choosing a loan term:
- Compare total interest paid for the time you expect to keep the loan.
- Ask yourself: Do the lower monthly payments justify the extra interest cost?
Your decision matters. Understanding this difference helps you choose the loan that truly
fits your financial goals.
