How You Can Reduce Your Total Loan Cost [14 Easy Ways]

how you can reduce your total loan cost

Whether it is a student loan, private loan, or federal loan, there are ways that you can use to reduce the total loan cost. Some situations can require you to take a loan, whether for personal use, emergencies, mortgage, or school fees, among other needs.

When such cases are over, you are left with a huge debt to settle, and the best way for a loan is to find ways to reduce the total cost so that you can reduce the burden that comes with repayment.

Some ways to reduce your total loan cost are to make faster payments, borrow only what you need, look for loans with better interest rates, improve your credit score to attract better and favorable rates, and refinance your loan.

Of course, that is just the tip of the iceberg. There are so many ways that you can use to settle your loan and reduce the total cost of your loan than it was initially. In this article, you will learn some insightful tips about total loan costs and how to minimize them, among other important facts.

What Is Total Loan Cost?

Total loan cost, in simple terms, means the total amount of money you have borrowed plus all the interest you will have to pay back. Depending on many factors, lenders use different ways to calculate the interest on loans.

It is also important to note that before a lender or a bank gives you a loan, they must first assess your creditworthiness to ensure that you are able to pay back the loan principal plus the interest within the agreed period. This is because most financial lenders are not risk takers; they, in most cases, need collateral for the loan before you can qualify for it.

Factors That Determine Your Total Loan Cost

There are so many things that can determine your total loan cost. Typically, your loan will have a specific length of repayment period where each month, your payments add up towards completing your loan. As you repay the loan monthly, the loan balance reduces until the last repayment. Therefore, some of the factors that determine your total loan cost include the following:

1. Credit Score

You can qualify for a higher loan with a good credit score. However, the higher the loan amount, the higher the interest you will eventually pay back. This is because lenders always use the credit score to determine whether you can repay the loan plus the interest.

2. Interest Rate

When calculating how much your loan will cost, the formula always carries with it the annual interest rate or the Annual Percentage Rate, the length of the loan repayment period, and the monthly payment. The interest rate is what determines how much you will pay eventually. Different lenders have different interest rates, and the current interest rate for personal loans in the United States is between 3% to 36%.

3. Income And Debt

Your income also determines how much your total loan cost will be. This is because you can only qualify for a specific loan if your income exceeds the amount the lender sets. So, for instance, you may not qualify for a higher loan amount when your income is too low.

In addition, if you have other loans that you are servicing, then the bank or lender will also consider that, and you might only qualify for a small loan that you can manage with your current earnings.

4. Type Of Loans

Different loan types have different terms, affecting the total loan cost. The various lenders and their terms can either make the total loan expensive for you or cheap. In addition, apart from the interest rate, some lenders, depending on the type of loan, may have other charges or fees in addition to interest, raising the total loan cost you will have to pay.

How You Can Reduce Your Total Loan Cost

how you can reduce your total loan cost and save money

There are various ways that you can employ to reduce your total loan cost. For example, when you borrow a loan, the repayment is spread throughout a specific period that you and the lender agree to. However, if you have borrowed the loan and get an alternative way or more earnings, it is possible to make your loan balance go down.

Of course, every lender would be happy with a client who wants to finish the repayment even earlier than the time agreed, and that comes with the benefit of reducing the total loan cost. Therefore, some of the ways that you can employ to reduce the total loan cost include the following: 

1. Develop A Budget

A budget will help you meet your expenses and to prioritize the most important things first. Of course, you may end up in debt without a budget since you may spend more than you earn. One of the ways to get out of debt faster is to track your spending and set up a budget.

When you track your spending and set a budget, you can set aside some money to repay the debts and remain with an amount that can cater to all your needs until your next paycheck if you are earning a salary. When developing a budget, you will use your regular spending to ensure that your budget caters to all of your cost of living expenses and extra expenses.

In your budget, you can dedicate a reasonable percentage of your income or earnings to loan repayment, which will help reduce your loan costs if the repayment amount is more than the one you agreed with your lender.

2. Borrow Only What You Need

borrow only what you need on how you can reduce your total loan cost

Don’t borrow more than what you need. Sometimes your good credit score might encourage you to borrow more, but you must restrict yourself to borrowing the amount you need. Even before you borrow, you must first understand the overall cost of that loan and whether you need it.

Sometimes you may borrow when you can get an alternative source or even forego your needs. In addition, some lenders have simple terms when it comes to borrowing and make it easy for you to access the loan, but you should always be careful not to borrow what you don’t need.

3. Pay Early And Often

Paying your loan early and often will help reduce your total loan cost. It is, however, important to ensure that you check the loan terms to ensure that you are allowed by your lender to make such repayments so that you can avoid the fees that may come with prepayment penalties.

Whether it is student loan debt or other types of loans, paying early and often will help reduce the loan balance and the overall interest. It is also important to note that most lenders allow flexible repayments and do not impose penalties on early loan repayments.

4. Make More Than The Minimum Payment Each Month

When you take out a loan, you agree with the lender to repay a certain amount of money each month towards your loan repayment and for a specified period. The amount you pay toward your monthly loan payments is usually calculated based on your ability and income.

If your earnings were low and have since increased after the minimum repayment was calculated, you can pay more than the minimum. But, of course, most lenders would encourage the habit of paying more than the minimum, which helps to reduce the total loan cost you would have otherwise paid.

5. Make Extra Payments

make extra payments to reduce your overall loan cost

One of the ways to help reduce your total loan cost is to repay faster. This is because when you make extra payments towards your loan, you cut off the interest you would otherwise have paid. In that regard, you need to make additional payments each year or each month than the one you have agreed with the lender.

Another thing to note about making extra monthly payments is that you will finish repaying your loan earlier than the stipulated time, which cuts off a lot of interest you would have paid throughout the repayment period.

6. Set Up Auto Pay

Most of the lenders for both private and federal loans have discounts for borrowers who wish to use automatic payments, and that discount is about 0.25% or 0.5%, depending on the lender. One of the advantages of automatic payments is that you don’t accidentally skip a payment since they are deducted automatically, which also helps with your credit score. 

7. Increase Your Credit Score

With a good credit score, you can qualify for different loan options from other lenders and better interest and loan rates. You can also negotiate favorable interest terms with a good credit score with your lender. Therefore, with lower or favorable interest, your total loan cost will be lower than it would be with a higher interest rate.

It is, therefore, important to ensure that you have a good credit score by paying your debts on time and avoiding unnecessary debts. In addition, check your credit report for inaccuracies because an error on your credit report can lead to a lower credit score range, preventing you from qualifying for more reasonable loan terms and the lowest rates possible. 

8. Shop Around And Compare Offers

If you have a good credit score, you have the flexibility to shop around and compare the different loan offers from other lenders. But, of course, not all lenders have favorable loan terms; therefore, you need to commit to a lender with flexible repayment terms and low-interest rates.

Whether you need a personal or auto loan, you need to compare the different lenders depending on the type of loan you want. For mortgages, there are a wide variety of options that you can compare, and whether to use bank mortgages, government loans, or private lenders.

The one with favorable terms and low interest will help reduce your total loan cost since the interest is low, and you can pay faster depending on your ability.

9. Refinance Your Loan

how you can reduce your total loan cost by refinancing

Refinancing the loan works when the interest rates by the lender have dropped or your financial situation has improved since you first took out the loan. When that happens, you can secure a loan with a lower interest rate to refinance your existing loan, which reduces the total loan cost.

It is important to note that interest rates can change with shifts in economic conditions. Therefore, the reasons for refinancing your loan are to benefit from the current lower interest throughout the entire repayment period and to charge the duration of that loan. In addition to that, there are different types of refinancing that includes the following:

Cash-Out Refinancing

This is when the asset you have used as collateral appreciates in value. With that, you can seek a higher loan to refinance your existing loan and benefit from the lower interest rate of the current loan.

Rate And Term Refinancing

This is common among borrowers who want to reduce their total loan cost. For example, it happens when you take a new loan with lower interest to refinance an expensive loan.

The other types of refinancing include cash-in refinancing and rate and consolidation refinancing. All these refinancing types can work in favor of reducing your total loan cost, but it depends on the type of loan and your lender.

10. Use Points To Reduce Interest Rates

In most cases, points work for mortgage loans, and you benefit from a lower interest rate when you buy points. The mortgage points refer to the fees that you can pay as a homebuyer to the bank or the lender so that you can benefit from the lower interest rate.

When you buy points from the lender, you are paying for the interests upfront, and the lender typically gives you a lower interest for the entire loan period. That works great in reducing the total loan cost for your mortgage loan.

11. Choose A Shorter-Term Length

Ideally, a shorter-term length of your loan means you will pay lower interest than a longer-term loan. For instance, if you take a loan to repay for five years, you will pay more than if you take one to repay for a short period, like three or two years. This is because, for the longer term, you will have to pay more interest spread out for the entire loan term than for the short-term loan.

12. Switch From Fixed-Rate To Variable-Rate Loans

Most lenders allow borrowers to switch from fixed rates to variable rates. As the names put, the fixed rate has the interest rate at the same level throughout the repayment period. At the same time, variable rates have interest rates varying depending on the economic times or changes in the market.

It is important to note that most loans, such as private student loans, personal loans, and mortgage loans, have variable rates, except auto loans which have fixed rates.

13. Don’t Allow Interest To Capitalize On Your Loan

Not allowing interest to capitalize on your loan means repaying your loan and the interest on time. If you miss out on your loan repayment for a certain period, the interest for that period will be added to your loan’s principal, which negatively impacts the total loan cost.

Therefore, if you want to reduce your total loan cost, you need to ensure that you make timely payments to avoid letting the interest add back to your loan’s principal, as that would increase the total loan cost.

14. Put Bonuses, Tax Refunds, Or Gift Money Toward Your Debt

how you can reduce your total loan cost by putting extra money towards your bill

When you pay your student loan interest, there is a tax deduction that you get as a tax refund or relief, and with that, you can use it to repay your loan so that you can finish faster than the time agreed with the lender. That reduces the total loan cost since the interest you pay more quickly will decrease significantly.

In addition, you can put all your bonuses and gifts towards your loan repayment to reduce the repayment period and the interests you would otherwise have to pay.

Final Thoughts

As you have learned above, there are several ways of reducing your total loan cost, and you can apply one that is favorable for you. But, of course, you can also have a mix of methods to reduce your total loan cost where possible.

When you buy points from the lender, you are paying for the interests upfront, and the lender typically gives you a lower interest for the entire loan period. That works great in reducing the total loan cost and allowing you to have lower monthly mortgage payments for your loan.