Paying Monzo Loan early doesn't reduce interest?

[danbeddows (Dan)]

I noticed some behaviour change in the app about 6 months ago, and the UI change for this recently which further cements my assumption that Monzo is now charging a fee on early repayments of loans, even though it is heavily marketed they do not.

Monzo shows the “balance + interest” amount on the home screen, and shows the “balance only” amount under the “Pay extra → Pay in full” screen.

You can deduce how much interest is remaining for your loan from the difference between these two figures.

Monzo presents two ways of partially repaying a loan early, one is “Pay extra” and one is “Pay early”

If you hit “Pay extra”, you get a fairly new UI that shows what your new monthly payment amount would be, and how much it would be reduced by

Monzo’s monthly payments have all future interest baked in. So paying off early reduces those monthly payments, as there will be less interest due.

But when you go to make a monthly payment early using the “Pay early” option (in my case, 5 months early), the monthly amount is not reduced at all.

Back to comparing those two figures like I mentioned earlier. When you pay off the monthly payment early, the difference between the balance with interest, and the balance without interest only changes by the amount you paid back - meaning there was no reduction in interest.

The only plausible explanation for that, is Monzo charges you a fee equivalent to the interest that would have been due if you had not paid back early. So, in my case, they would charge me 5 months interest on £450.66 as soon as I pay back.

This obviously contradicts all of their marketing, and language in app, so I’d like to think this is not the case.

And I know this behaviour has changed. As you can see my next payment date is June. I’ve repaid early a few times now. And each time I’ve “Paid early” it’s reduced the monthly amount due each subsequent time I’ve paid back early (and reduced the total balance by the payment amount plus extra, which is reduced interest).

So what gives? Is this a bug? Or is Monzo now charging interest on early repayments, contradicting their claim they are not?

cc @EdSB

[Carlo1460]

Do you no longer work at monzo to raise it internally?

[breville_monkey]

@danbeddows

But when you go to make a monthly payment early (in my case, 5 months early), the monthly amount is not reduced at all.

I don’t know your interest rate or loan amount but is it not possible you just aren’t proposing to pay enough back to reduce the next payment?

The ‘pay early’ feature allows you to make a single payment earlier than the normal schedule as I understand. It’s not an additional payment you are making. The only interest you’d be saving is the interest on that payment amount between the dates you are paying it and you would have paid it - it’s very possible that’s under 1p.

[breville_monkey]

Also how is your next payment in 5 months? Is it possible that your agreement means you aren’t due to pay interest in the next five months, for example the repayments are frozen for financial difficulties, or a pre-agreed interest free period? As if interest isn’t payable in that time, you won’t be saving anything by paying early!

[Orinoco]

When I last had a loan it did say the option to pay early wouldn’t have any other impact than just paying that amount earlier than the date it’d usually be taken. So the screenshots reflect how I remember it working.

The more confusing bit is as above, why the next payment isn’t until July. I paid about 40% of mine off in one go and it didn’t defer the next payment at all, just reduced the monthly amount for the rest of the term. So seems like there’s something else at play if the next payment actually is July.

[danbeddows (Dan)]

@Carlo1460

Do you no longer work at monzo to raise it internally?

Given I’ve written almost exclusively positive things about Monzo over the years, I’m not surprised you think I’ve worked for them but alas, I have not worked for them before

[danbeddows (Dan)]

@breville_monkey

I don’t know your interest rate or loan amount but is it not possible you just aren’t proposing to pay enough back to reduce the next payment?

The ‘pay early’ feature allows you to make a single payment earlier than the normal schedule as I understand. It’s not an additional payment you are making. The only interest you’d be saving is the interest on that payment amount between the dates you are paying it and you would have paid it - it’s very possible that’s under 1p.

That’s a solid guess, but given my rate and term, paying my monthly amount back early should reduce my monthly payments (and overall loan balance). It has previously, by a pretty noticeable amount.

Even in the first screenshot, paying back £5 early has some effect. (I realise some of this is just the actual £5 spread over the remaining term, though)

[danbeddows (Dan)]

@breville_monkey

Also how is your next payment in 5 months? Is it possible that your agreement means you aren’t due to pay interest in the next five months, for example the repayments are frozen for financial difficulties, or a pre-agreed interest free period? As if interest isn’t payable in that time, you won’t be saving anything by paying early!

A few months ago, I paid my monthly amount early (a few times, and my next payment is still a few months out). When I did that, it did reduce my monthly payments, and I could see the interest saved reflected in the balance.

Something has changed, and now it does not do that.

[danbeddows (Dan)]

@Orinoco

When I last had a loan it did say the option to pay early wouldn’t have any other impact than just paying that amount earlier than the date it’d usually be taken. So the screenshots reflect how I remember it working.

The more confusing bit is as above, why the next payment isn’t until July. I paid about 40% of mine off in one go and it didn’t defer the next payment at all, just reduced the monthly amount for the rest of the term. So seems like there’s something else at play if the next payment actually is July.

That’s strange it definitely should have. They market it on their website too, not just the app Personal Loans | Get a Loan that Treats You Right | Monzo.

If they still charge you interest on money you are no longer lending, they are de facto charging you a fee.

My next payment isn’t until July as I used the “Pay early” option a few times, as opposed to “Paying back extra”.

[Orinoco]

I guess it could be interpreted that way, but my understanding was it just took that month’s payment earlier than usual but wouldn’t change anything else, and it explained for each option. So it had:

Pay early - if your repayment date was normally the 27th, you’d pay it today (16th) and there’d be no payment taken on the 27th
Pay extra - make a one-off lump sum payment, future payments get re-calculated based on the new balance, and routine payment on the 27th is still taken as normal (albeit reduced)
Pay in full - full balance settlement

That was the case for me as-of 2021-2022 and seems to match what’s in your screenshots. Well, apart from the deferred payment until July, but I can see where the confusion may be coming from.

I never used the “pay early” option, and I assumed that’d be a once-a-month thing. But if you’ve stacked them up maybe that’s what the bug is, I don’t think that’s designed to be used more than once a month, you’d have used “pay extra” instead. I would have expected the “pay early” option to be unavailable until the next month once it had been used.

I can see what you mean though about “pay early” being essentially the same as using “pay extra” for the same amount. But I’m pretty sure it explains it wouldn’t change future payments. The issue is I think it’s more “we don’t explicitly charge you a fee for doing so” vs “we will always reduce the interest” because I think some loans have an explicit fee for early payments. So no fee isn’t the same as reduced interest. A fee would be an explicit charge on top of the payment.

[breville_monkey]

@danbeddows

A few months ago, I paid my monthly amount early (a few times, and my next payment is still a few months out)

If you’ve been doing it a lot of the time, I do think this is going to skew the maths and that’s why it doesn’t show a saving.

On mine, if I paid early today I would save 0.02p on my remaining payments according to the app - I just did the maths and that’s the full saving I’d expect. So it definitely can reduce payments, so I’m still convinced in your case it’s somehow that this proposed payment doesn’t save interest or saves too little to show.

Its easier to see the impact if you use the ‘pay extra’ feature as that’s actually an additional payment, not just shifting the payment dates around

[coffeemadman (Jonathon 🏳️‍🌈)]

Both ways reduce interest for me. It’s be something to do with being so far ahead with your payments (though I don’t know what or how).

[danbeddows (Dan)]

@breville_monkey

If you’ve been doing it a lot of the time, I do think this is going to skew the maths and that’s why it doesn’t show a saving.

I haven’t done it in a while.

But in any case, the more you do it, the more your payments should go down exponentially. If I choose the pay back early option now, I’m not paying a month early - I’m paying 5 months early! That’s 5 months not lending £450. Even at a 1% rate, that is more than £2/year saved (and it’s more than 1% ).

@breville_monkey

Its easier to see the impact if you use the ‘pay extra’ feature as that’s actually an additional payment, not just shifting the payment dates around

It used to just be as easy, because it used to show a reduced payment schedule for the pay early feature too. That is what I’m trying to say I have done this before, and it’s now changed

[danbeddows (Dan)]

@coffeemadman

Both ways reduce interest for me. It’s be something to do with being so far ahead with your payments (though I don’t know what or how).

This is interesting!

Which leads to me thinking there’s an a/b test going on here. And I’m in the test, and they’ve started charging interest for paying early, very disappointing if so, especially as the flexibility with payments was the kicker to chose Monzo over another lender.

[michaelw90 (Michael)]

@danbeddows

And I’m in the test, and they’ve started charging interest for paying early.

They can’t do that without updating your loan terms. You’re best reaching out to support (or maybe @TheoGibson could prod someone who may be in the loans team)

[breville_monkey]

@danbeddows

It used to just be as easy, because it used to show a reduced payment schedule for the pay early feature too. That is what I’m trying to say

As I said, it still does for me too. If you aren’t paying for 5 months I don’t get why you don’t just use the pay extra feature.

If I were to guess, I’d say it isn’t calculating it 5 months in advance, it’s only calculating the saving between your next sechuled payment and the one you plan to make. That, or it just wasn’t designed to handle 6 months in a row and you’ve somehow broken it

I highly doubt there is an a/b test with fees or interest on existing loans and outside of any changes to your loan agreement.

[Orinoco]

@breville_monkey

That, or it just wasn’t designed to handle 6 months in a row and you’ve somehow broken it

That’s still my assumption as I definitely remember it saying paying early wouldn’t affect future payments as far back as 2021.

[danbeddows (Dan)]

@breville_monkey

If I were to guess, I’d say it isn’t calculating it 5 months in advance, it’s only calculating the saving between your next sechuled payment and the one you plan to make. That, or it just wasn’t designed to handle 6 months in a row and you’ve somehow broken it

My wife also had a Monzo loan and hasn’t paid early before.

She has the option, and also doesn’t save any interest. And given her term and payments, she would definitely save too.

[Muhandis]

I don’t get the OP’s logic but this it. There is no way that Monzo (or any other bank) would do a/b testing by just choosing to charge a random fee.

If this is happening, it’s an unintended error on Monzo’s part but my guess is there’s nothing nefarious going on and the OP would be best off speaking to customer support or raising a formal complaint if he isn’t satisfied with their explanation.

[EdSB (Ed Stuart-Bourne)]

@danbeddows Thanks for bringing this to our attention! I was on holiday last week but we’re looking into this now and will be back with an update for you soon.

I can confirm we have not made any changes involving charging extra fees as part of this UI refresh, though.