Does it cost to pay off a loan 5 months early?

[helen_bells]

Hi there. I have 5 months left to pay on my loan, and since its just under £500 I thought I would pay it off early. But I wanted to find out first if there are hidden fees or ghastly "administration" costs if I chose to do that. I just want to know if its worth my while or would I just be better keeping the money in the bank and pay it off month by month. Advice would be appreciated, many thanks.

[Coactum]

There is a thing called Rule of 78 which goes something like:

 

(M(M+1/n(n+1))k

 

In which n is the total number of instalments, m is the number of remaining instalments to be paid, and K is the interest

 

So, if you loan was for 12 months and 5 months remain and interest was £100 you would have:

(30/156)*100 = 19.20

 

So, as you can see the interest rebate is relatively low.

[Coactum]

Sorry I should have explained that the reason is on day one interest is charged on £500 but on the last month it is the remaining fraction of £500. Interest on a big number is clearly far more than interest on a small number. You pay equal instalments and so on month 1 most of what you pay is interest and only a small amount is capital, but on the last month most is capital and only a little is interest.

[MrShed]

I think the OP was asking about early redemption charges as opposed to interest rebate.

 

I would have thought that this would depend on the individual contract.