How Can You Reduce Your Total Loan Cost?

Want to know how you can reduce your total loan cost? By improving your credit score, shopping around with multiple lenders, making larger down payments, considering shorter loan terms, and making extra payments to pay down the principal, you can save thousands over the life of your loans. Keep reading to discover more strategies like refinancing, avoiding fees, and leveraging tax deductions to keep more money in your pocket.

26 Ways to Reduce Your Total Loan Cost

1. Improve Your Credit Score
2. Shop Around With Multiple Lenders
3. Make a larger down payment
4. Consider a Shorter Loan Term
5. Make Extra Payments to Pay Down the Principal
6. Refinance If Rates Drop
7. Pay Down High-Interest Debt First
8. Understand How Interest Works
9. Avoid Fees However Possible
10. Make Bi-Weekly Payments to Cut Interest
11. Turn to Federal Loans Over Private
12. Weigh 15 vs 30-Year Mortgages
13. Know Your Loan Amortization Schedule
14. Automate your payments
15. Consider debt consolidation
16. Negotiate with your lender
17. Take advantage of tax deductions
18. Avoid extending your loan term
19. Review your loan agreement regularly
20. Consider a cosigner
21. Utilize Loan Forgiveness Programs
22. Opt for Direct Debit
23. Leverage Relationship Discounts
24. Consider Income-Driven Repayment Plans
25. Pay Interest Upfront (If Possible)
26. Avoid Adjustable Rate Mortgages

1. Improve Your Credit Score

A higher credit score translates to lower interest rates because lenders view a high credit score as a sign that you’re less likely to default on your loan.

You can improve your credit score by paying all your bills on time, not using too much of your available credit, not applying for too much new credit, having a long history of credit use and having a mix of different types of credit such as credit cards and installment loans.

Take action: Check your credit score for free using services like Credit Karma or Credit Sesame, and create a plan to boost your score.

2. Shop Around With Multiple Lenders

Different lenders may offer different interest rates and terms depending on their criteria. By shopping around, you can compare these different offers and choose the one that best suits your financial situation.

Always ensure to understand the entire loan agreement, including any potential hidden fees or charges imposed by the lender, before signing it.

Take action: Create a spreadsheet to compare loan offers from at least three different lenders. Don’t just focus on the interest rate – look at the total cost of the loan, including any fees, to find the best deal for your unique financial situation. And remember, knowledge is power, so make sure you understand every detail of the loan agreement before signing on the dotted line!

3. Make a larger down payment

Making a larger down payment can significantly reduce your total loan cost. This is because the amount you pay upfront will decrease the total amount of money you need to borrow. Therefore, you will pay less in interest over the course of your loan term.

Additionally, making a larger down payment can also potentially help you avoid needing to pay for private mortgage insurance (PMI), which is usually required if you make a down payment of less than 20% on a home. It should be noted though, this strategy requires more cash up front, so it is important to have sufficient savings first.

Disclaimer: While making a larger down payment can save you money in the long run, it’s important to make sure you have enough savings left over for emergencies and other expenses.

Take action: Start saving for your down payment today! Set up a separate savings account and automate your contributions. Cut back on unnecessary expenses and put that money towards your down payment fund instead. Remember, every dollar you save now is one less dollar you’ll pay in interest later.

4. Consider a Shorter Loan Term

Though monthly payments might be higher with a shorter term, the overall interest paid throughout the life of the loan will be less.

This is because you’re borrowing money for a shorter duration, which reduces the lender’s risk and consequently the interest rate offered. However, this will require you to be able to accommodate the higher monthly payments in your budget. Always ensure that your budget can handle these larger payments before opting for a shorter loan term.

Take action: Crunch the numbers and see if a shorter loan term makes sense for your unique financial situation. Use an online loan calculator to compare the total cost of different loan terms. If you can comfortably afford the higher monthly payments, go for it! Your future self will thank you for saving all that money on interest.

5. Make Extra Payments to Pay Down the Principal

Making extra payments on your loan reduces the amount of interest you pay over the life of the loan, ultimately lowering the total loan cost. This approach saves you money, especially if your loan carries a high interest rate.

However, before you start making extra payments, ensure your lender doesn’t charge penalties for prepayment. While these charges are rare, it’s always a good idea to check. Making extra payments can take the form of paying more per month, making bi-weekly payments, or even making one extra payment annually.

Pro tip: If you get a bonus at work or a tax refund, consider putting a chunk of it towards your loan. It’s like giving your debt a knockout punch!

Take action: Look for ways to free up extra cash in your budget, like cutting back on subscriptions or dining out. Then, put that money towards your loan principal. You can make extra payments monthly, bi-weekly, or even annually. Every little bit helps! 💪

6. Refinance If Rates Drop

Refinancing your loan if rates drop can be a lucrative strategy to reduce your total loan cost. When you refinance, you essentially take out a new loan with a lower interest rate to pay off your existing loan. This can lower your monthly payments and save a significant amount on interest over the life of the loan.

However, be aware that refinancing comes with costs too, such as closing costs, so it’s important to calculate if the potential savings outweigh these fees. Also, refinancing might not be the best option if you plan to move or pay off your loan in the near future.

Pro tip: If you’re planning to move or pay off your loan soon, refinancing might not make sense. Crunch the numbers and make sure it’s worth your while before taking the plunge.

Take action: Keep an eye on interest rates and talk to your lender about refinancing options. You can also shop around with other lenders to find the best deal. Don’t be afraid to negotiate – you might be surprised at how much you can save just by asking!

7. Pay Down High-Interest Debt First

Another effective strategy to reduce total loan cost is to focus on paying down high-interest debt first, also known as the avalanche method. This often means tackling credit card debt before other types of loans. By concentrating your additional payments toward your highest interest debt first, you can reduce the most costly debt more quickly.

Once you’ve paid off the highest interest debt, move onto the debt with the next highest rate, and continue this method until all your debts are paid off. This strategy reduces the amount of interest you will pay overall, hence reducing the total cost of your loans. Ensure, however, that while you’re focusing on high-interest debt, the minimum payments for all your other liabilities are being met.

Take action: Make a list of all your debts, from highest interest rate to lowest. Set up automatic minimum payments on everything except the top debt on your list. Then, throw any extra money you can spare at that high-interest debt until it’s gone. Rinse and repeat until you’re debt-free and doing a victory dance!

8. Understand How Interest Works

Understanding how interest works can go a long way in reducing your total loan cost. Interest is generally calculated as a percentage of the outstanding loan balance, which is why making extra payments to reduce the principal can save you money over time.

For loans with compounded interest, interest is calculated on not only the initial loan amount (or principal), but also on any interest that has previously been added.

Therefore, the more frequently interest is compounded, the more interest you’ll pay overall. Additionally, understanding the difference between fixed and variable interest rates can help make informed decisions, as having a variable rate loan can result in your interest rate, and therefore payments, increasing or decreasing over time.

Pro tip: If you have a variable-rate loan, keep an eye on market trends. If rates start to rise, consider refinancing to a fixed rate to lock in your savings before it’s too late!

Take action: Read the fine print on your loan agreements and make sure you understand how interest is calculated. Is it compounded daily, monthly, or annually? Is your rate fixed or variable? By knowing these details, you can make informed decisions about paying off your loans faster and saving big on interest.

9. Avoid Fees However Possible

Fees can come in many forms such as late fees, prepayment penalties, loan origination fees, and annual fees among others. Make sure to keep track of your due dates to avoid late fees and always read your loan contract thoroughly to understand any potential fees associated with your loan.

If you’re considering paying your loan off early, check if there are prepayment penalties. Some lenders will charge a fee if you pay off your loan before the end of the term. It’s also important to compare different lenders and their associated fees when shopping for a loan.

Pro tip: If you do get hit with a fee, don’t be afraid to negotiate! Some lenders may be willing to waive or reduce fees if you ask nicely and have a good track record of on-time payments.

Take action: Read the fine print before signing any loan agreement and look out for hidden fees. Compare offers from multiple lenders and choose the one with the lowest fees and best terms. If you’re already stuck with a fee-heavy loan, consider refinancing to a fee-free option to save big in the long run.

10. Make Bi-Weekly Payments to Cut Interest

By making a half-payment every two weeks, you’ll end up making one extra payment each year without realizing a significant impact on your monthly budget.

This approach reduces your principal faster, and therefore, you’ll pay less interest over the life of the loan. It’s essentially a simple way of making an extra payment every year without a large lump sum. However, before starting, make sure your lender doesn’t charge any fees for making extra payments or payments more frequently.

Take action: Contact your lender and ask if they offer a bi-weekly payment plan. If they don’t, you can still make extra payments on your own by dividing your monthly payment in half and sending it in every two weeks. Just make sure to label the extra payments as “principal only” so they don’t get applied to future interest.

11. Turn to Federal Loans Over Private

Federal loans generally have lower interest rates and more generous repayment terms than private loans, making them a more cost-effective choice for many borrowers. They also offer added benefits like income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options during financial hardship.

On the other hand, private loans often have variable interest rates which can increase over time, lack flexibility in repayment plans, and offer fewer benefits regarding deferment or loan forgiveness. Always consider federal loans before turning to private loans, especially for education costs.

Take action: Always fill out the Free Application for Federal Student Aid (FAFSA) to see what kind of federal loans and grants you qualify for. If you need to take out private loans, shop around and compare offers from multiple lenders before signing on the dotted line. And don’t forget to read the fine print – you don’t want any sneaky surprises down the road!

12. Weigh 15 vs 30-Year Mortgages

When weighing a 15-year versus a 30-year mortgage, it’s important to consider your financial situation and long-term plans. While a 15-year mortgage may have a lower interest rate and enable you to pay off your home faster, it also comes with higher monthly payments.

On the other hand, a 30-year mortgage will have lower monthly payments, but the total interest you’ll pay over the life of the loan will be higher. Before choosing, consider your budget, financial goals, and whether you plan on staying in the house long-term or not.

Take action: Grab your calculator and crunch the numbers to see which option fits your budget and long-term goals. If you have the financial flexibility to handle higher monthly payments, the 15-year mortgage could be your knockout choice. But if you need a little more breathing room in your budget, the 30-year option might be the way to go.

13. Know Your Loan Amortization Schedule

An amortization schedule breaks down each payment by principal and interest and shows the remaining balance after each payment. Early in your repayment period, more of your payment goes toward interest.

As the loan matures, a larger portion of each payment goes toward the principal. Understanding this can help you strategize extra payments or a refinance plan, ultimately helping reduce your total loan cost. Most lenders provide this information, but you can also find online tools and calculators to help you understand your own loan amortization schedule.

Take action: Request your amortization schedule from your lender or use an online calculator to create your own. Study it like a treasure map and look for opportunities to make extra payments towards the principal. Even small additional payments can make a big dent in your debt over time.

14. Automate your payments

Automating your payments can help reduce your total loan cost by ensuring your payments are always on time, hence avoiding late fees. Many lenders offer automatic payment options where the monthly payment is automatically deducted from your checking account.

This not only saves you time but also ensures that you never miss a payment. Some lenders even offer interest rate discounts when you set up automatic payments, further reducing your loan cost. However, be sure to always keep enough money in your account to cover the automated payments to avoid overdraft fees.

Pro tip: If you’re worried about overdrafting your account, set up a buffer by keeping a small cushion of extra cash in your checking account. It’s like having a spare tire for your finances – you never know when you might need it!

Take action: Contact your lender and ask about setting up automatic payments. Make sure you have enough cash in your account to cover the withdrawals each month, and consider setting up a budget to stay on track.

15. Consider debt consolidation

Debt consolidation merges numerous high-interest debts into a solitary loan with a lower interest rate. This not only simplifies repayment by having one single payment to make each month, it can also significantly lower your monthly payment and the amount of interest you pay over time.

Keep in mind, however, that while debt consolidation can reduce your monthly payments, you might end up paying more in total interest over a longer repayment term. Always weigh the costs and benefits before consolidating debt and make sure to continue making all of your payments on time to avoid late fees.

Take action: If you’re considering debt consolidation, shop around for the best rates and terms from reputable lenders. Read the fine print carefully and make sure you understand all the fees and potential risks involved. And most importantly, create a budget and stick to it like glue – no more impulse purchases or retail therapy sessions!

16. Negotiate with your lender

Negotiating with your lender can involve discussing your interest rates, repayment terms, or even late fee charges. It’s especially worth trying to negotiate if your credit score has improved since you took out the loan, if you’ve been a loyal customer for a number of years, or if you can demonstrate financial hardship.

However, success isn’t guaranteed, it depends on various factors including your lender’s policies. Always approach negotiations politely and professionally, and be prepared with supporting documentation to strengthen your case.

Take action: Make a list of all your loans and lenders, and start reaching out to them one by one. Be prepared to make your case and have a specific ask in mind, like a 2% interest rate reduction or a waived annual fee. And if at first you don’t succeed, try again – persistence pays off!

17. Take advantage of tax deductions

Many forms of loan interest, like mortgage interest and student loan interest, are tax-deductible and can lessen your total loan cost over time. For example, homeowners can often deduct mortgage interest from their taxable income on their federal tax return.

Similarly, there are education loans where the interest paid can be claimed as a deduction. By diligently claiming these deductions, you can lower your overall tax bill, effectively reducing the total cost of your loan. It’s recommended to consult with a tax professional to ensure you’re taking full advantage of these deductions.

Pro tip: If you’re not sure whether you qualify for a deduction, err on the side of caution and claim it anyway. The worst that can happen is the IRS says no and you have to pay a little extra. But if you don’t claim it and you were eligible, you could be leaving money on the table. It’s like playing a game of tax roulette – sometimes you just have to spin the wheel and see where it lands!

Take action: Before you file your taxes, make a list of all your loans and the interest you’ve paid on each one. Then, consult with a tax professional or use tax preparation software to see which deductions you qualify for. It’s like having a GPS for your tax return – it’ll help you navigate the twists and turns and arrive at your destination (a lower tax bill) safely!

18. Avoid extending your loan term

Avoiding the extension of your loan term can help to reduce your total loan cost. While extending the term of your loan may lower your monthly payments, it also means that you will ultimately pay more in interest over time.

If you are refinancing, for example, it might be tempting to extend the term of the loan to get lower payments. However, this will result in paying more in interest in the long run. It’s generally best to try and pay off your loan as quickly as you feasibly can to minimize the amount of interest that you will have to pay.

Take action: If you’re considering refinancing or consolidating your loans, crunch the numbers and see how different loan terms will affect your total interest paid. And if you’re tempted to extend your term to lower your monthly payments, see if you can cut expenses elsewhere in your budget instead.

19. Review your loan agreement regularly

Reviewing your loan agreement regularly can help ensure you’re aware of the terms and any changes that might occur. This is especially important if you have a variable rate loan, as your interest rate and subsequently your monthly payments may change over time.

Regularly reviewing your loan documents can also help you stay familiar with any fees or penalties associated with your loan, such as late fees or prepayment penalties. This, in turn, will allow you to effectively manage your loan and take steps to reduce the total cost.

Take action: Set a reminder in your calendar to review your loan agreements at least once a year. Make a list of any questions or concerns you have, and don’t be afraid to reach out to your lender for clarification. The more you learn, the better equipped you’ll be to ace the test of debt management!

20. Consider a cosigner

If you have a low credit score or are a first-time borrower, considering a cosigner could significantly reduce your loan cost. A cosigner with a good credit history can help you qualify for a loan you might otherwise be denied or secure a lower interest rate.

Indeed, lenders view cosigners as additional security for the loan as they are responsible to pay back the loan if you default. However, this strategy requires someone willing to take on the potential risk. Cosigning a loan can impact the cosigner’s credit and they will be held legally responsible if you fail to make the repayments.

Take action: If you’re considering asking someone to cosign a loan for you, start by making a list of potential candidates. Look for someone who has a strong credit score, a steady income, and a trusting relationship with you. Then, sit down with them and have a frank discussion about the risks and responsibilities of cosigning.

21. Utilize Loan Forgiveness Programs

If you have federal student loans, you may be eligible for loan forgiveness programs. These programs could forgive all or a portion of your student loan debt if you meet certain requirements, typically related to your occupation and the length of time you’ve been making payments.

For example, Public Service Loan Forgiveness (PSLF) forgives the remaining balance on your Direct Loans after you have made 120 qualifying payments under a qualifying repayment plan while working full-time for a qualifying employer.

Teacher Loan Forgiveness is another program that forgives up to $17,500 of Direct or FFEL Program loans for teachers who have been employed full-time in a low-income school or educational service agency for five consecutive years, among other qualifications.

Before applying for these programs, make sure you fully understand the requirements and implications for your loans.

Take action: If you think you might be eligible for a loan forgiveness program, start by contacting your loan servicer or the Department of Education to learn more. Gather all the necessary documents and make sure you understand the requirements inside and out.

22. Opt for Direct Debit

Opting for direct debit can help reduce your total loan costs as some lenders offer a small discount on your interest rate if you choose to have your monthly loan payments automatically withdrawn from your bank account. This also ensures that your payments will be made on time each month, helping you avoid late fees.

However, you’ll have to make sure you always have enough money in your account to cover the direct debit to avoid overdraft fees from your bank. Before setting this up, check with your lender to see if they offer a discount for using direct debit.

Pro tip: If you’re worried about overdrafting your account, consider setting up a separate savings account just for your loan payments. That way, you can make sure you always have enough money set aside and avoid any costly surprises. It’s like having a secret stash of cash for a rainy day!

Take action: If you’re not already using direct debit for your loan payments, contact your lender to set it up. It’s a quick and easy process that could save you time, money, and hassle in the long run.

23. Leverage Relationship Discounts

Some lenders offer relationship discounts to customers who have other accounts or products with them. For example, if you have a checking account with a bank, the bank might offer you a lower interest rate on a loan or a credit card.

Similarly, some lenders offer relationship discounts to customers who refinance existing loans. This can be a great way to reduce the total cost of your loan. Check with your lender or banks you are already a customer of, to see if they offer this type of discount.

Pro tip: If you’re not happy with the relationship discounts (or lack thereof) offered by your current bank, consider switching to a new one that values your loyalty. Look for banks or credit unions that offer special perks or promotions for long-time customers.

Take action: The next time you’re in the market for a loan or credit card, make sure to leverage your existing relationships with banks and lenders. Ask about special rates, promotions, or discounts for loyal customers. And don’t be afraid to negotiate and shop around – you never know what kind of deal you might be able to score!

24. Consider Income-Driven Repayment Plans

For federal student loans, borrowers can consider income-driven repayment plans which cap the monthly payments at a certain percentage of the borrower’s income. This can decrease monthly payments, making your debt more manageable. However, by extending the loan term and making smaller payments, you may pay more interest over the life of the loan.

Yet, under these plans, any outstanding balance of the loan is generally forgiven after 20-25 years, which can be an advantage for those with high debt levels.

Four income-driven repayment plans exist: the Revised Pay As You Earn Repayment Plan (REPAYE Plan), the Pay As You Earn Repayment Plan (PAYE Plan), and the Income-Based Repayment Plan (IBR Plan), and the Income-Contingent Repayment Plan (ICR Plan).

Pro tip: If you’re pursuing Public Service Loan Forgiveness (PSLF), make sure to choose an IDR plan that qualifies for the program. Not all plans are eligible, so do your research and double-check with your loan servicer.

Take action: If you’re struggling to make your student loan payments, contact your loan servicer and ask about income-driven repayment plans. They can help you determine which plan you qualify for and how to apply.

25. Pay Interest Upfront (If Possible)

If you have the financial ability to do so, consider paying interest upfront. This is known as paying “points” on a mortgage loan, where a point equals 1% of your loan amount. By paying this cost upfront, you can secure a lower interest rate, reducing the total amount you pay over the life of the loan.

This strategy can be particularly beneficial if you plan to stay in your home for a long time, as the savings you gain from lower monthly payments will eventually surpass the upfront costs. Be sure to calculate whether the long-term savings outweigh the immediate costs before deciding to pay interest upfront.

Take action: If you’re considering paying interest upfront on your mortgage, talk to your lender and run the numbers to see how much you could save. Make sure to factor in your long-term plans and budget constraints before making a decision.

26. Avoid Adjustable Rate Mortgages

Adjustable Rate Mortgages (ARMs) offer lower interest rates initially, but the rates can adjust over time based on market conditions. That means if interest rates rise, so will your mortgage rate and monthly payment. For some, the unpredictability of ARMs can make budgeting more difficult and could potentially lead to higher costs in the future.

It might be best to stick to fixed-rate mortgages which have a set interest rate for the life of the loan, offering more stability and predictability with your payments. However, everyone’s situation is unique, and an ARM may be advantageous if you plan to sell or refinance before the rate adjusts.

Take action: If you’re shopping for a mortgage, focus on fixed-rate options and avoid ARMs like the plague. Don’t be tempted by the low initial rates – remember, if something seems too good to be true, it probably is!

Conclusion

Reducing your total loan cost is achievable through a combination of strategies. From improving your credit score and shopping around for the best rates, to making extra payments and considering loan forgiveness programs, there are numerous ways to save money over the life of your loans.

By understanding how interest works, avoiding unnecessary fees, and staying on top of your loan agreements, you can take control of your debt and pave the way for a brighter financial future. Remember, every dollar saved on interest is a dollar back in your pocket – so start implementing these strategies today and watch your savings grow!

Frequently Asked Questions

Learn More:

• Eagle Community Loan Program
• Days Loan Reviews