Loan repayments

By THIS IS MONEY
Updated:

 

In June 1998 I took out a five-year personal loan for £15,000 (plus payment protection) from Royal Bank of Scotland. I had another loan from a different lender, repaying £225 a month over one year, and RBS suggested I extend my loan with them for another 12 months to pay it off. Having made payments of £5,000 over 12 months I was told the settlement figure would be £13,500. I thought I had paid off £3,000 of the capital sum and £2,000 in interest but I was told the extra £1,500 was the settlement cost and this was standard with all lenders under the Consumer Credit Act. Is this correct? GG, Much Wenlock, Shropshire.

Joanna O'Brien of Personal Finance advisers Moneyfacts says: It is true that all banks have the right to charge you for paying off loans early and most do - this is the settlement cost that the bank is talking about. You should have been made aware of this when you took out the loan and it may be details in the written terms an conditions. The reason they make these charges is that when you pay off a loan early the bank loses your interest payments, so they make a charge to cover that loss and their admin costs.

As for the level of the settlement cost, the Office of Fair Trading says: Under the Consumer Credit Act, regulated loan agreements (those up to £30,000) can impose a charge for early settlement. It may be worked out in different ways by different lenders but there is a maximum charge that it cannot exceed. It varies according to the loan.

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