About 56% of Americans do not have enough savings to cover an unexpected $1,000 bill.1 But thankfully, borrowing money is an option. For example, installment loans can provide much-needed financial relief for unexpected expenses.
However, loans can be expensive. So, you may ask, “How can I reduce my total loan cost?” Keep reading to learn the different steps you can take to save money by lowering loan costs!
Why Are Loans So Expensive?
A lot of factors can affect the total cost of a loan, such as:
| Factor | Description | Example Impact |
| Interest Rate | The percentage of the loan amount that is charged as interest. Higher rates mean higher monthly payments. | A 15% interest rate is more expensive than a 5% rate. |
| Repayment Length | The duration over which you have to repay the loan. Longer terms can mean more interest paid. | A 30-year mortgage will accrue more interest than a 15-year mortgage. |
| Loan Amount | The total sum borrowed. Larger loans mean more to repay, including interest. | A $50,000 loan will have more interest fees than a $10,000 one. |
| Fees and Charges | Additional charges like origination fees, late fees, and prepayment penalties. | A 3% origination fee on a $20,000 loan adds an extra $600. |
| Type of Interest | Fixed vs. Variable. Variable rates can increase over time, making the loan more expensive. | A variable rate that rises from 4% to 8% can significantly increase cost. |
| Credit Score | Your creditworthiness can affect the interest rate you’re offered. Lower scores often mean higher rates. | A credit score of 600 may result in a higher interest rate compared to a score of 750. |
5 Ways To Lower Loan Fees
Loans can be pretty pricey due to interest rates, origination fees, and other charges. If you want to make borrowing money more affordable, try one of the following tips!
1. Repay the Loan Early
Lower the total cost of borrowing by repaying the money 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.
2. Switch to a Fixed Interest Rate
Loans have either a fixed or variable interest rate. Fixed-rate loans generally have a predictable payment schedule, while the monthly payment amount for variable-rate loans changes frequently.
3. 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.
4. Increase Your Credit Score
Increasing your credit score can help you get better rates, which lowers your total borrowing fees. Lenders generally offer high rates to low-credit borrowers that pose a financial risk. But improving your credit can help you get lower rates in the future, which lowers the total sum you pay to borrow funds!
- This is a common method found on competitor pages, and since the blog already provides ways to increase credit scores, we should also put it as a potential way to reduce loan costs.
- Write a brief paragraph on why/how increasing your credit score can lower the loan amount and interest rates.
5. Set Up Monthly Auto Payments
Setting up automatic payments can help you avoid the stress of remembering to pay your monthly bills on time. This useful feature also helps you avoid late fees, which can increase the total you pay to borrow money. Most financial institutions offer autopay, which is easy to set up. You may also have the option to set up a monthly automatic payment higher than the minimum, which can speed up your repayment plan and lower your interest fees.
How To Quickly Pay Off Your Outstanding Debt
Millions of Americans borrow funds with credit cards, so it’s perfectly normal to have credit card debt. Unfortunately, the interest rates that credit card companies offer are generally exorbitant so it’s best to pay off credit card debt as quickly as possible. But you can take steps to lower the amount you pay in interest fees!
1. Pay More Than the Minimum
A minimum payment is the smallest sum you can pay monthly on your credit card bill. Minimum payments are convenient, but borrowers will accumulate more interest fees. Paying more than the minimum ensures you pay down the principal balance and save money!
2. 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 snowball or avalanche repayment method.
3. Avoid Fees By Paying On Time
Late payments can result in late fees, which are generally flat rate fees that can increase over time due to multiple late payments. Making an effort to pay bills on time can help you avoid paying unnecessary fees that decrease your checking account. Consider signing up for autopay or setting up monthly payment alerts to avoid future late fees!
4. Consolidate Your Loans
Consolidating debt is the process of merging multiple debt accounts into one monthly payment. By consolidating debt, you may be able to get a lower interest rate. A lower rate from credit card consolidation loans can save you a lot of money, which leaves more money in your pocket for other expenses. And having to deal with one monthly bill instead of several can help you better manage your financial stress.
How To Reduce the Cost of Your Student Loan Balance
Almost every student pursuing higher education uses student loans, and many have a mix of private and federal student loans. They 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 lower your monthly payments and total loan fees.
1. Refinance Private Student Loans
Refinancing a loan means replacing an existing loan agreement with another to obtain more favorable terms. Unfortunately, the interest rates for private loans depend on 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.
2. Get an Income-Based Repayment Plan for Federal Student Loans
Federal student loans offer various income-based repayment plans. Suppose your income changes, and you can no longer afford your monthly payments. In that case, you can lower the cost by applying for a different plan.
These are the income-based repayment plans available:
- Saving on a Valuable Education (SAVE) Plan—formerly the REPAYE Plan
- Pay As You Earn (PAYE) Repayment Plan
- Income-Based Repayment (IBR) Plan
- Income-Contingent Repayment (ICR) Plan
3. Consider Loan Forgiveness Programs
Public loan forgiveness is entirely possible to get! This occurs when a lender forgives the remaining balance of your federal debt. A forgiveness program can take care of your outstanding debt if you meet specific requirements. Check out some federal forgiveness programs below:
- The Public Service Loan Forgiveness (PSLF) program forgives debt for eligible borrowers that work full-time for a qualifying not-for-profit organization.
- The Teacher Loan Forgiveness program can forgive up to $17,500 if you teach full time for five academic years in certain schools or educational service agencies.
- The Income-Driven Repayment (IDR) Forgiveness program can forgive your remaining debt under an IDR plan after you make a certain number of payments over 20 or 25 years.
Unfortunately, it’s very difficult to get private funded debt forgiven. However, you can try negotiating with your creditor if you are struggling with repayment. Contact your creditor or read through your financial contract to determine if negotiating loan forgiveness is possible.
Ways to Increase Your Credit Score Quickly
Increasing your credit score can reduce the total cost of a 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 on online loans and credit cards can help you secure low rates and better loan terms. And remember that other bills can also affect your credit. For example, financing a phone could help you build credit. Consider signing up for automatic payments or mobile alerts.
2. Pay Down Existing Debt
Minimizing the amount of debt you have will improve your credit score and debt-to-income ratio (DTI). Your debt affects your FICO score by 30%, so try to pay down your personal debt. Lenders often offer excellent interest rates and repayment terms to borrowers with a manageable amount of debt.
3. Dispute Credit Report Errors
Borrowers must 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.
FAQs About Reducing Loan Balance
Can I Negotiate the Interest Rate on My Student Loan Debt?
While student government loans come with fixed interest rates, some private lenders may be open to negotiation. Suppose you’ve improved your credit score or have a cosigner with excellent credit. In that case, you might be able to secure a lower interest rate on your student loan debt.
What Happens if I Only Make the Minimum Payment on My Federal Loans?
Making only the minimum payment will extend the life of the loan and increase the total interest you pay over time. While it keeps you in good standing, it’s not the most practical strategy for paying off student loan debt.
Can I Refinance Federal Student Loans With a Private Lender?
You can refinance federal student loans with a private lender, but be cautious. Refinancing federal loans with a private lender means losing federal benefits like income-driven repayment plans and loan forgiveness options. Make sure to weigh the pros and cons before making a decision.
How Does Paying Student Loan Interest While Still in School Affect My Loan Cost?
Paying student loan interest while you’re still in school can significantly reduce the total cost of your loan. This prevents the interest from capitalizing and being added to your principal, which is what you’ll be charged interest on once you start repayment.
Can Consolidating My Loans Help in Reducing the Overall Loan Cost?
Consolidating multiple federal loans into a single one can make managing your student loan payments easier. Still, it may or may not lower your interest rate. The new interest rate would be a weighted average of the rates on the loans being consolidated, rounded up to the nearest one-eighth percent.
Tips From CreditNinja on Reducing Your Total Loan Costs
Loans are expensive, but you can reduce your total loan cost by carefully comparing your options and improving your finances. CreditNinja offers quick cash loans with competitive rates and flexible repayment terms. Inquire online today to see if you qualify to borrow money!
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