Why has our loan hardly reduced two years on?

Q In 2002 my husband and I took out a loan with First National bank to pay for some double glazing. The loan was for ?7,562 (which included an acceptance fee and a payment protection insurance premium).

We pay ?123.50 a month so by my calculations we have already paid around ?4,000. But when I requested a settlement figure for the loan, I was told we still owe ?7,418.

I understand that the interest rate is high - 16.9% - but this still seems a completely unacceptable settlement figure.

LH

A Interest on loans is not calculated the way most consumers expect. When you take out a loan for a set amount over a set period, the interest is calculated to reflect that full term and each of your monthly repayments go to pay off some of the interest owed and some of the capital.

Unfortunately, interest payable on personal loans is front-loaded, which means that in the early years of repayment, a much higher proportion of the monthly payment goes to pay off the interest. So, in the first few years of the loan, the amount of capital owed reduces by very little - and that's why you find yourself still owing almost your entire capital sum after more than two years of repayment.

What's more, your monthly repayments include a figure for loan protection insurance - not a penny of which reduces either the capital or the interest owed - and a proportion of your acceptance fee, on which you will be paying interest for the full term of the loan. Finally, paying any loan off early can incur a nasty early redemption charge. These can be pretty steep and there may be one included in your settlement figure, though you'd have to check your loan contract to know whether you're liable for such a charge.

All of this is likely to have contributed to the admittedly extortionate sum you still owe, but it's worthwhile asking for a detailed breakdown of how your repayments have been progressing, just to ensure no mistakes have been made.