Borrowing money allows consumers to acquire fast emergency cash. Loans such as an Installment loan, can provide much-needed financial relief for medical bills, car repairs, and other unexpected expenses.
However, loans can cost a pretty penny. So you may ask, “How can you reduce your total loan cost?” There are many answers to this question! Keep reading to learn the different steps you can take to save money by reducing loan costs!
Why Are Some Loans So Expensive?
Do you find yourself stuck with a higher-than-average loan repayment plan that is challenging to pay every month? Loans can be expensive due to the interest rates, repayment length, and loan amount.
- The Interest Rate: A high-interest rate increases the overall cost when you borrow money. A borrower’s interest rate depends on their credit score and whether they get a variable or fixed-rate loan. Borrowers with high credit scores tend to get the lowest rates, while low-credit borrowers usually get higher rates.
- The Repayment Length: The amount of time a borrower has for repayment can directly affect the affordability of monthly payments. A short repayment term could result in a high monthly payment amount. In contrast, an extended repayment length may lower the monthly cost of a loan. Keep in mind that an extended repayment schedule may cost less overall because many lenders tend to issue lower rates on long-term loans.
- The Loan Amount: A high loan balance can increase the cost of borrowing money. You may want to avoid borrowing a large lump sum to reduce the amount you have to pay in interest charges. If you need the maximum loan amount a lender provides, take time to compare interest rates to reduce your total loan cost.
How To Reduce the Cost of Installment Loans?
Installment loans are loans that borrowers pay off through monthly payments. If you want to save money on your current installment loan, try one of the following tips!
Pay the Loan Early
One way to reduce the total cost of an installment loan is to pay the loan early! Early payment means less interest and more money in your bank account. However, verifying that your financial institution does not charge prepayment penalties is essential.
Lenders may charge a prepayment penalty fee, also known as an early payoff fee when a borrower pays off the loan early. Some lenders charge these fees because they earn less money from the loan. But suppose your lender does not charge prepayment penalties. In that case, you can repay the installment loan early to pay fewer interest fees!
Switch to a Fixed Interest Rate
Loans have either a fixed or variable interest rate. Fixed rates result in a predictable payment schedule. This is because the specific interest rate a borrower acquires does not change for the entire loan term. On the other hand, variable-rate loans may change, altering the monthly payment amount. Variable interest rates depend on an underlying benchmark interest rate or index rate.
Many borrowers choose variable-rate loans because there is a possibility that monthly payments can be very low. However, variable rates can also increase unexpectedly. You may find yourself unable to afford your monthly loan payments if variable rates increase exponentially. Switching to a fixed rate can save you money and make sticking to a budget plan easier!
Refinance the Loan
Refinancing a loan is when a borrower replaces their current loan agreement with a new one to get better loan terms. Refinancing can reduce the overall cost of the loan because you could get lower interest rates and fewer fees. The refinancing process is similar to applying for a new loan. Since you have already been through the approval process, you may be better prepared to ask questions and get important information.
How To Reduce the Cost of Credit Cards?
Millions of Americans use credit cards, so it’s perfectly normal to have credit card debt. Unfortunately, the interest rates that credit card companies offer can add up to a significant amount. But you can take steps to reduce the amount you pay in interest fees!
Pay More Than the Minimum
The minimum payment is the smallest amount you can pay monthly on your credit card bill. Minimum payments are convenient because they are usually small dollar amounts that leave you with more pocket money. However, borrowers will accumulate more interest fees on their credit accounts and increase the principal balance. When you pay the minimum, only a tiny portion of your payment actually goes toward the current balance. Paying more than the minimum ensures that you save a lot on interest charges and work on paying down your credit card debt!
Avoid Carrying a Balance
Carrying a balance month to month will result in interest fees being added to your overall balance. Credit cards make money by charging interest on borrowed funds. But you do not have to pay interest if you pay your balance in full every month!
To avoid accumulating too much credit card debt, you can follow these tips:
- Avoid making large purchases that cannot be paid off immediately.
- Avoid continued use of your credit card if you already have a balance.
- Follow the debt avalanche or snowball repayment method.
How To Reduce the Cost of Student Loan Debt
Almost every student pursuing higher education uses student loans, and many have a mix of private and federal loans. Student loans cover various qualified educational expenses like tuition, room and board, books, supplies, etc. Student loan payments can be pretty high, but there are multiple ways to reduce your monthly payment amount and total loan cost. Generally, there are two types of student loans:
Private Student Loans
Private financial organizations provide private student loans. Students typically cannot change their private student loan repayment plan. However, if you find keeping up with monthly payments challenging, you can look into refinancing.
Refinancing a loan means replacing an existing loan agreement with another to obtain more favorable terms. Unfortunately, the interest rates for private loans depend primarily on a student’s existing credit scores. Low scores indicate credit risk, so many financial institutions will charge higher interest payments. But if your credit score has increased since you obtained the loan, you may qualify for a lower rate! Student loan borrowers can refinance with their existing lender or work with a new one.
Federal Student Loans
A federal student loan is provided by the federal government. There are subsidized, unsubsidized, and PLUS student loan options.
Federal student loans may be more convenient for students because they offer grace periods and deferments. A grace period allows for some time to pay if you miss a due date, while a deferment allows a borrower to temporarily stop making payments.
In addition, federal student loans offer various repayment terms. Suppose at any point you struggle to repay your federal student loan. In that case, you can change to a new repayment plan at any time as long as you meet the qualifications.
These are a few federal student loan plans available:
- Graduated Repayment Plan
- Extended Repayment Plan
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
Five Ways to Increase Your Credit Score Quickly
Increasing your credit score can help you reduce the total cost of a loan. A good credit score indicates that you are financially responsible and capable of repaying your debts on time. Here are some methods to use once your credit score is higher:
- Ask your credit card issuer for a lower APR.
- Refinance with a new lender to get new loan terms.
- Apply for a low-rate debt consolidation loan.
Here are a few ways you can start to improve your credit score today:
1. Make Timely Payments
Your payment history counts for 35% of a FICO score. A long history of timely payments can help you secure low-interest rates and better loan terms. If you have trouble remembering to pay your debt bills on time, sign up for automatic payments or mobile alerts. Specific lenders may offer a small discount to autopay borrowers, so you can save even more money!
2. Pay Down Existing Debt
Minimizing the amount of debt you have will improve your credit score and debt-to-income ratio (DTI). The amount of debt you have affects your FICO score by 30%, and a low DTI proves that you can manage debt responsibly. Lenders often offer excellent interest rates and repayment terms to borrowers with a manageable amount of debt.
3. Ask for a Higher Credit Limit
A higher credit limit means a borrower can spend more without negatively affecting their credit. According to financial experts, borrowers should avoid using more than 30% of their total available credit. Suppose your credit has improved since opening your credit account. In that case, you can ask your creditor for a higher credit limit.
4. Dispute Credit Report Errors
It’s crucial for borrowers to check their credit reports at least once a year. Errors are common, and your credit score may decrease due to a mistaken balance or payment date. Consumers are entitled to one free annual credit report from the three major consumer reporting companies. To get your free reports, visit the Annual Credit Report website.
5. Use a Secured Credit Card
A secured credit card works like a traditional card, with a few key differences. Secured credit cards are meant to help consumers build an excellent payment history. You provide a security deposit to the credit card company, and that amount is your credit limit. You can use your secured credit card to make purchases up to your credit limit amount and potentially build a strong credit score.
The Bottom Line: Taking Out a Loan
There are various ways to reduce the total loan cost! Borrowers can decrease the cost of interest payments through multiple methods, such as lowering their current debt amount, refinancing, or building a stronger credit history. Borrowing money can cost a lot, but you can reduce the amount you pay lenders by comparing your options carefully and improving your personal finance.
References:
Federal Student Loan Repayment Plan│Federal Student Aid