Separate interest payment outside of monthly schedule

...Ghost...

To those more financially astute, can you help me understand this payment.

€12k loan drawn down at end of March. No penalty for early payment. Intend to pay inside of a year. Taken over 4 years just for a manageable monthly repayment. It was a green car loan to upgrade one of our cars. Here are the loan summary details.

So, the repayments are supposed to be €283.29 monthly. I plan to pay some lumps off over the year to clear it.

I paid €4k off it in April when I sold the old car. I added the loan account to my internet banking to watch it and easily pay money off it.

This week, I noticed an interest payment of €83.02 being added to the outstanding. While I am sure this is normal and I am missing something simple, I expected the repayments to be €283.29 each month until the loan amount is cleared. Clearing it early would reduce the interest due. I wasn't expecting to see interest payments outside of this, as the 40 monthly payments add up to the total amount borrowed, plus interest.

What am I missing? Something as simple as the interest rate increasing? Though I am not aware it has!

NewbridgeIR

Nothing unusual in that.

There are three types of transaction on a loan account.

1/ Drawdown - where the amount of credit advanced is debited to the loan account

2/ Interest - debited to the loan account at specific regular intervals (monthly or quarterly). Based on the outstanding daily balance at the agreed rate.

3/ Repayments - credited to the loan account at specific regular intervals (usually monthly)

The €83.02 interest charge falls under category 2.

Out of course repayments just mean that the loan will be repaid ahead of schedule.

Just for a second, assume that there are no out of course repayments and the loan runs for the four year term. If you get the statements and add up all the amounts in the debit column, they should equal €13,597.92 (made up of €12,000 drawdown plus the regular interest charges). And if you add up all the amounts in the credit column (made up of 48 repayments of €283.29), then that should also add up to €13,597.92.

...Ghost...

https://www.boards.ie/discussion/comment/122185324#Comment_122185324

Just for a second, assume that there are no out of course repayments and the loan runs for the four year term. If you get the statements and add up all the amounts in the debit column, they should equal €13,597.92 (made up of €12,000 drawdown plus the regular interest charges). And if you add up all the amounts in the credit column (made up of 48 repayments of €283.29), then that should also add up to €13,597.92.

That's what I am finding confusing. Forget for a second that I paid €4,000 off in the first month. With 48 payments of €283.29 = €13,597.92 (€12,000 principal, plus €1,597.92), the out of schedule interest payment of €83.02 brings the total loan payment to €13,680.94 and that assumes no additional interest being applied outside of the scheduled monthly payments.

So, is the cost of credit (interest) €1,597.92 as per the loan document, or is it €1,680.94, or more?

My understanding is that the interest payments are equally built into and spread across the scheduled 48 monthly payments. Otherwise the monthly payment would be €250 (12,000/48) plus whatever the annualised interest remains (excuse my poor financial terminology).

NewbridgeIR

But you haven't paid an extra €83.02. This amount has just been debited to the loan account which is how all loan accounts operate. The interest has to be charged to the loan account at regular intervals over the life of the loan. As the outstanding loan balance decreases over time, you will notice that the interest amount debited to it each month (or quarter) also falls.

The cost of credit is the difference between the total repayments (€283.29 x 48 which are taken from a current account) and the amount of the loan (€12,000). In this case it's still €1,597.92.

If the bank didn't apply the interest to the loan account at regular intervals then you would see it fully repaid (with a surplus) by the 43rd repayment (43 x 283.29 = 12,181.47).

The only thing that looks odd with the loan agreement is the timing of the first repayment. It's a 48 month term so if the loan is expiring on 01/04/2028 (the date of the final repayment), then the first repayment should be made on 01/05/2024. Normally the first repayment is made one month after drawdown. So the 48 repayments would be made as follows:

2024 - 8 (May, June, July, August, September, October, November, December)

2025 - 12 (January, February, March, April, May, June, July, August, September, October, November, December)

2026 - 12 (January, February, March, April, May, June, July, August, September, October, November, December)

2027 - 12 (January, February, March, April, May, June, July, August, September, October, November, December)

2028 - 4 (January, February, March, April)