Interest rates continue to rise because the Fed thinks this will reduce inflation. So this means the cost of borrowing money is increasing. And if you have an existing loan with an adjustable rate, the cost of that loan is also increasing. We’ll explain the cost of borrowing money, how to reduce loan costs, and how to reduce interest rates on your student loans.
Cost of borrowing money
Banks and other lenders are not charities. They are in the business of making money. They make money by charge interest on money borrowed for home, personal, auto, business and student loans and credit cards. Interest is the cost of borrowing money. And sometimes, loans and credit cards also charge various fees.
Reduce total loan cost
There are several ways to reduce the cost of borrow currency. Shop around for the best rates. There are online loan aggregators for different types of loans. You can enter some basic information about yourself and view possible loan terms. The aggregator will perform a “soft” credit check. This does not affect your credit score. If you apply for one of the loans, the lender will perform a “hard” credit check, which will temporarily reduce your score by a few points.
How Can You Reduce Your Total Loan Cost?
The high cost of college drives students to borrow loans. These loans can be expensive in the long run as the interest charged increases the total amount to be repaid. We’ve listed 10 practical ways to help reduce your total loan costs so that payments are easier to make.
College can be expensive for many students, which is why over 50% of students in the US take out loans – either private, federal, or both.
The average cost of on-campus attendance for in-state undergraduate students attending a public institution is approximately $104,108 over 4 years. Whereas, undergraduate students studying at private non-profit universities pay more than $200,000 over the course of 4 years. This cost includes tuition and fees and college-related living expenses such as transportation, room and board, etc.
Through loans, students can cover the high cost of obtaining a degree and be able to successfully complete college. However, the problem is that some of these students are having difficulty repaying the money they have borrowed. This article will help you find solutions on how you can reduce your total loan cost easily, quickly and effectively.
Ten Ways To Reduce Your Total Loan Cost
We have ten ways to help you answer this question: How can you lower your total loan costs?
All the method suggested are simple and sensible and can help you reduce the loan cost considerably. You can even combine all the options given, or even combine a few, so the savings you get will be greater than using just one solution.
However, ahead of we get to ways to reduce the total loan cost, it is best to know the parameter that are used to calculate the interest and total loan. The formula to calculate interest on a loan includes the principal amount borrowed (P), the interest rate (R), and the period or time (T) you have to repay the loan completely. The main thing to understand is that any change in any one of these components can help change the total cost of your loan.
So, if you can reduce the principal amount, reduce the total time, or get discounted interest rates, the total interest will be reduced resulting in a cheaper loan in the long run. There are several ways to help reduce these costs and reduce the overall debt burden.
The following are the 10 best ways to reduce your total loan costs.
- Compare offers and research beforehand
If you’re trying to reduce your total loan costs, it’s best to start early. Many lenders offer slightly different rates from each other. Many of them allow you to check rates by filling out a quick online form. Checking rates this way won’t affect your credit score.
Therefore, it is best to compare and research the offers before accepting any loan. If you just go with the first one you qualify for without looking around, you may end up with a more expensive option.
You can also prioritize federal loans if you qualify for them. Federal loans offered to students generally have lower interest rates than private loans. Additionally, if you end up working in the public sector after graduation, you may also have the option to have your loan forgiven or receive more leverage.
- Use Auto Pay for interest rate reduction
Using autopay is another answer to how you can reduce your total loan costs. This is actually a very convenient way to do this.
Many lenders offer the option of automatic payments where the loan provider takes money directly from your bank account on a fixed date every month. If you choose this you can enjoy a reduction in interest rate typically of 0.25%. This amount may seem small, but makes a notable difference in the long run. This will not only reduce the rate but will also remove the hassle of paying the monthly installment manually. This way you can also avoid late payments and penalties.
This method reduces the value of ‘R’ in the formula used to calculate the interest. So, if your basic interest rate of 5% is reduced by 0.25%, you will reduce your total loan cost and save money.
- Choose a shorter tenure
Some lenders offer options in terms of repayment tenure. Repayment period refers to the number of years within which you have to repay the loan completely. To minimize the overall cost, it is best to choose the lowest term option available. This may mean paying a higher monthly payment; However, in the long run, it reduces the overall cost of the loan. Therefore, the sooner you repay your loan, the lower will be the overall interest.
This overall reduction occurs because ‘T’ in the interest calculation formula is reduced thereby reducing the calculated interest. For example, if you take a loan of $12,000 at a 5% interest rate and instead of paying it off over 10 years, you choose a shorter term of 8 years. By doing this, you will save $1,200 compared to the 10 year scenario.
However, keep in mind that this method may mean higher monthly payments. Therefore, always choose a plan that you can easily afford and avoid late payments or penalties. You can also do some extra work to help with the loan and pay it off sooner.
- Pay more than the minimum payment
Making extra costs can also help reduce your total loan cost. The more you pay, the faster your loan balance will reduce. Firstly, this will reduce your outstanding principal amount very rapidly, which will reduce the interest rates. This will also help you reduce the total duration of your payments, resulting in a lower total amount of interest you pay in the long run.
However, before making additional payments, it is always wise to check with your lender as some may charge a penalty for early repayment. Also, make sure you have enough funds to make the additional payments. Don’t burden yourself financially if you are able to make at least the minimum payment.
- Refinance your loan
One way to lower your overall loan costs is to refinance with a different lender. This involves switching the existing loan to another lender offering more favorable terms. The situation may be more favorable for you if you can develop a good credit score.
When students graduate and start working the status of their credit scores usually changes and improves. Once your credit score increases, you may qualify for lower interest rates. There are many ways you can increase your credit score and enjoy its benefits while still having a cheap loan. However, you may have to switch from a federal student loan and refinance it into a private student loan to reap the benefits.
However, keep in mind that refinancing your original loan into a private student loan may result in losing some options and benefits that you can only get through federal loans. Additionally, refinancing has many variables and may not apply to everyone. Therefore, the end result in terms of savings may vary from situation to situation.
- Seek loan forgiveness for student loan debt
If you’re really struggling to repay your loan, there are several useful options available to you. Many organizations provide financial aid to students who are unable to repay their loans. This opportunity is usually available to graduates who work in non-profit organizations or the public sector. However, some programs are also targeted at those working in other sectors.
These programs are usually career-related, such as loan forgiveness programs for nurses, and most people can find one they can apply for. However, competition for such programs is quite high and you will have to prove that your financial situation is not good enough to repay the loan.
You can also look for scholarships that award money to students. You can use this money to pay off your student loans.
- Use a portion of your bonus, tax refund, or gift money
You can try to reduce your overall payment by putting a part of your bonus, tax refund and gift amount towards loan repayment. This will mean that you will pay more than the minimum payment, which will also reduce your overall time frame and the amount of following payments.
The amount you put into the loan does not matter. Even the smallest contribution can help a lot.
- Look for loyalty discounts
If you have been a previous customer of your current lender, you may be eligible for a loyalty discount. Some lenders offer this to retain their customers. Additionally, having a previous customer who has successfully repaid his loan on time gives lenders more confidence and can offer lower interest rates.
There is also a certain group of customers with specific criteria who are offered greater discounts. You can contact your lender to know if you meet any such criteria.
- Budgeting
Increasing a budget can also help reduce your total loan costs. This can help you prioritize your expenses which can help you avoid overspending. This way, you can easily set aside some money to help pay off your debt in a short period of time. You may also be able to make additional payments this way, which may lower your overall loan costs.
- Do not allow interest to be compounded
If you postpone your interest payments or do not pay on time, the amount gets accumulated. Missed payments are added to the principal amount of your loan which will increase your overall loan balance and you will pay interest on that higher loan amount. Therefore, always pay on time or before time so that interest does not accrue on your loan.
Read Also: What are the 4 types of student loans?