Borrowing more on exisiting personal loan, being charged interest on interest?

Hi there

the above has happened to a family member. In brief she had a personal loan due to be paid off in May 2012, monthly repayments approx 180 per month. She had an overdraft of approx 1300 with the same bank, and in June/July 2010 she decided to add this to the personal loan. The loan is now due to be paid off in July 2013. The repayments are still around the 180 mark. She recently added up the money involved and realised that the extra she is paying 180 by 15 months = 2700 for an add-on loan of 1300.

Now she had suffered a bereavement in 2007 as her husband died suddenly and she really is only getting back to herself in the last while, including examining her finances, so it is quite possible she signed and agreed to any type of terms and conditions. She thinks that the bank gave her a cost for clearing her original loan early, including interest she would have paid if the original had gone to term, added on the 1300 and then rearranged the whole thing to be paid over 3 years, but it seems extremely unfair.

Any advice?

Thanks

At a rough guess,your relative settled her first reasonably priced loan for about 4000,added on the 1300,and got a new 3 year loan at the mid 2008 rate of 13%.
Does this sound about right?

Hi Vandriver, thanks for replying. From what I understand it must have been something like that - she had I suppose in July 2010 22 monthly 180 payments left on the original loan, would have worked out as 4000 outstanding including interest for the full term. Then she added 1300 to the loan. I suppose naively maybe she thought that interest wouldn't be charged for the full term of the old loan as she was in effect paying it off. She rather thought that she would continue paying as before but that it would take maybe a year longer due to the top up amount of 1300. It looks like she was charged for the full amount of the old loan and is in effect paying double interest. Same bank account etc., so it's not like the bank were losing out on the interest on the original loan as they would if she was paying it back from a new loan from a different bank. I know myself I cleared a car loan early from a different bank a few years ago and was pleasantly surprised to find that the cost of clearing it was cheaper than the remaining payments. It just seems very unfair. She doesn't think that the person she dealt with explained it to her that well, or at least she thought that she was only paying off the outstanding capital owed and then getting a new loan for that plus the 1300 and paying interest on that. Is she just in a situation of putting up and shutting up? Terms and conditions apply and all that? This person is elderly and living on her own with no one she can really go to for advice, she is financially stable, there are no frills, but 500/600 is an awful lot of money to her. For example if a person remortgaged their house and paid off their first mortgage would they be paying all the interest for say a 20 yr term and adding it on to their new mortgage and paying interest on it again? Surely no one would ever remortgage if that was the case.... I understand that one doesn't just pay off outstanding capital and walk away as banking is a business, but would expect that a cost of clearing a loan early would be less than the full remaining payments unless there were clauses to prevent that being the case? I would look at the documentation but I don't live near her unfortunately! She cleared the overdraft because she had heard of people being contacted by the bank and being asked to clear overdrafts and she panicked in case it happened to her as she wouldn't have that kind of money available.

I wouldn't get fixated on whether there was a small deduction for settling the old loan early.There probably was,but if the loan was quite low cost,the settlement reduction would have been quite small.
The only reason she has paid/will pay a lot is the high personal loan rates brought on by the credit crunch.
I suppose the one small consolation would be that if the person had done nothing for 3 years,she would have paid 6-700 in overdraft interest,and still owe the 1300.

Hi Vandriver, I was just speaking to her on the phone, she can't find her original loan documents but the new one says it cost approx 4300 to clear it, so this plus 1300 was 5600 for the new one. She's not really sure where the figure of 4300 came from. I will explain about the higher interest rates to her and mention that she would have paid 6 or 700 on the overdraft anyway which kinda makes it 6 of one or half a dozen of the other when you look at it like that. Thanks very much for pointing it out, and your time.

I just rang her back again and she is really feeling much better about it now and understands that the interest rate is much higher on the new loan, and is comforted by the fact that she would have been paying interest on the overdraft amount too if she hadn't done anything about it... I think she was afraid she had done something silly or was afraid of being somehow taken advantage of due to lack of understanding. She feels better now so I can't thank you enough.

If interest rates go up on a variable rate personal loan,generally the bank doesn't change the monthly payment but rather the term is extended.So,the original loan might not have ended at the original end date but might have run on for a few extra months.This would explain the settlement figure that seems higher than number of months left multiplied by loan payment.