Life is tough for us all financially these days. There comes a time when, regardless of how financially disciplined you’ve been, you might need to borrow some money to cover extra, unexpected expenses.
However, when you borrow money in the form of a loan, you need to pay it back with interest and some possible fees on top. Interest and fees are different for many lenders so you’ll need to be savvy when it comes to searching the market for loans.
So, how can you reduce your total loan cost? In this guide, we’ll show you some handy tips on how to reduce your total loan cost before you take one out and how you can reduce loan cost when you have already taken out a loan.
So, get yourself comfortable and join us as we explore how you can lower the costs of your loan.
What Is A Loan, And How Does It Work?
There are many types of loans and that is important to know before you begin. There are secured and unsecured loans which are the most common. The former is often referred to as a collateral loan.
When loans are secured, they are offered on the basis that you provide something as collateral, which is normally your house.
Lenders will typically ask for this if a person’s credit score isn’t very high, and they are a risk to repay the loan balance.
Loans are in essence, a way to borrow an amount of money and pay it back through specific loan terms. A common loan type is an installment personal loan.
This is where a person will borrow, usually a large sum of money and repay it with a monthly payment agreed.
Each loan however will have its own terms. A payday loan for example typically has the most unfavorable terms due to its convenience and the fact that they offer loans to most people, regardless of their credit rating.
However, to make things simple – we’ll use a personal loan as a guide. If a person borrows $10,000 from a lender, the lender may offer this at an APR or interest rate of 10%.
This means that the overall amount the borrower must pay back is $11,000 and this is normally set out in their monthly payment.
But some lenders will also charge loan fees, handling fees, administration fees etc. These are important to look out for in the credit agreement as they can wildly alter the amount expected to be repaid.
Reducing Costs When You Already Have A Loan
If you’ve already accepted a loan agreement and made some payments, you may have discovered that the amount repayable per month has become a problem. There are some ways you can try to reduce this:
Contact The Lender
Lenders understand that people’s circumstances change, and when a loan agreement is normally for a period of several years (especially with installment loans), the lender will always prefer that you contact them for assistance.
You can ask the lender for an APR grace period to try to save yourself a few bucks over a couple of months, but the lender will likely expect this to be paid at the end of the loan agreement anyway.
You could try to renegotiate the terms of your loan with the lender and see if they will accept this. It’s uncommon for a lender to reduce costs in this way, but it’s not unheard of.
They might expect collateral instead or a longer term to your loan.
Pay The Loan Back Early
Okay, this is a little more complicated and works in some situations but not in all. Some lenders will offer the borrower a discounted rate, should they choose to repay the loan back early. If you have the financial means to do this, you should always consider it.
A lender might significantly reduce the interest expected, or they might waive certain fees expected in the original agreement. The terms of early repayment will be outlined in your credit agreement.
Beware though that some lenders do not offer this and may even charge you an additional fee for trying to repay earlier.
Take Out A Debt Consolidation Loan
While some people may argue it is unwise to borrow money to pay for already borrowed money, sometimes it makes much more sense to do this to save you money overall.
If your original loan has horrendous terms to it, taking out a second loan with much better terms can be the way to go. You could repay the original loan and begin to make regular, cheaper and much more manageable repayments with your new lender.
Request Digital Statements
Some lenders may charge a borrower a little extra each month to send paper documents. Always check if they have done this and request digital copies instead. It may not be much, but overall it will save you more money.
Use Your Credit Card
If you have a large enough credit limit and a favorable 0% interest rate or large 0% interest period on your credit card, consider paying the personal loan off this way and making payments towards your credit card instead.
The repayment options are normally better this way.
Increase Your Monthly Payment
Some lenders will allow you to pay more than you’re expected to each month. Doing so can reduce the number of months the loan will take to pay off and may save you some interest fees too. This works best for student loan payments.
Reducing Loan Costs Before You Take One Out
There are a number of ways you can reduce the cost of your loan before you decide to take one out. Here are some tips:
Improve Your Credit Score
The loan type you may be offered and the terms of certain loans will undoubtedly be considered against your credit report. If your report indicates a high score, you should be offered much better loan terms such as a lower interest rate.
You can improve your credit score by managing your credit, bills and other debt repayments responsibly and have a regular income for a long time.
Remember, your credit history which will be found through a credit check will be the primary factor in your offered loan terms.
Research Your Loan Options
Depending on what your loan is for, a loan lender might request certain requirements, such as collateral for example.
It might be better to search for credit cards at 0% or search for debt consolidation or refinance loans, depending on your situation to save yourself costs that will be apparent in the long run.
Always ensure you’re researching lenders too and what their rate offered is on their website or in branch. Terms offered may vary, but if your credit score is high – you should be offered the best rate.
If they’re offering you something other than this, always ask why and try your hand elsewhere.
Don’t Overdo It
If you’re looking to get a loan for a vehicle or simply for vacation, don’t borrow an amount that you do not need. Even though it is usually recommended to borrow slightly more than you need to cover for unexpected expenses, you should never overdo it.
If your desired vehicle is going to cost you a crippling loan debt, perhaps consider getting a cheaper vehicle. If your vacation costs $10,000 – don’t borrow $50,000.
The Bottom Line
Loans can be overwhelming if they are not managed correctly and this will happen if you have an unfavorable set of terms in the loan agreement. Always check the terms before you accept a loan and never take out more than you can afford.