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Early Repayment of BOI car loan

  • 15-02-2016 2:48pm
    #1
    PaidV
    Registered Users Posts: 71 ✭✭


    Hi all,

    Need some advice. I am thinking of taking out a car loan. Bank of Ireland have quoted me 7.5% variable apr. The credit cost on the loan is say €1000 for a 3 year loan.
    Now I know there is no fee for paying the loan back early but if I decide to pay it back after a year will the same credit cost of €1000 still apply or will it only be for the 1 year I have the loan? I.e. if I pay the loan back after the 1st of a 3 year loan the credit cost will only be €333?

    Is my logic correct?

    Thanks!
    Padraig


Comments

  • #2
    Nody
    Moderators, Category Moderators, Arts Moderators, Business & Finance Moderators, Entertainment Moderators, Society & Culture Moderators Posts: 18,327 CMod ✭✭✭✭Nody


    Depends on the terms; some will charge you the full loan interest even if paid back early and some don't so you need to read the terms or ask the bank.


  • #3
    coylemj
    Registered Users, Registered Users 2 Posts: 25,476 ✭✭✭✭coylemj


    PaidV wrote: »
    Now I know there is no fee for paying the loan back early but if I decide to pay it back after a year will the same credit cost of €1000 still apply or will it only be for the 1 year I have the loan? I.e. if I pay the loan back after the 1st of a 3 year loan the credit cost will only be €333?

    Is my logic correct?

    This is maths, not logic and the answer is no. The reason is because with a standard term loan involving a variable interest rate, interest is applied on a continuous basis based on a reducing balance. The result is that there is more interest accrued in the early part of the term than later on..

    To take an example using numbers similar to what you've quoted.... If you borrowed €10,000 over three years at a variable APR of 7.25%, the monthly repayment would be €310 meaning that over the period of the loan you would pay €11,160 i.e. the principal and €1,160 interest. That interest would be heavily skewed towards the first year - €624 in the first 12 months, €392 for months 13 to 24 and €142 for months 25 to 36.

    As the balance reduces, so does the monthly interest that the bank adds on, hence the interest added on in the last year represents only 12% of the total.


  • #4
    PaidV
    Registered Users Posts: 71 ✭✭PaidV


    coylemj wrote: »
    This is maths, not logic and the answer is no. The reason is because with a standard term loan involving a variable interest rate, interest is applied on a continuous basis based on a reducinog balance. The result is that there is more interest accrued in the early part of the term than later on..

    To take an example using numbers similar to what you've quoted.... If you borrowed €10,000 over three years at a variable APR of 7.25%, the monthly repayment would be €310 meaning that over the period of the loan you would pay €11,160 i.e. the principal and €1,160 interest. That interest would be heavily skewed towards the first year - €624 in the first 12 months, €392 for months 13 to 24 and €142 for months 25 to 36.

    As the balance reduces, so does the monthly interest that the bank adds on, hence the interest added on in the last year represents only 12% of the total.

    Thanks for the answer above but maybe chill out on the patronising assessment of what constitutes logic.


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