How Can You Reduce Your Total Loan Cost? 14 Ways By Experts

how can you reduce your total loan cost

Taking out a loan can be complicated and expensive. But it doesn’t have to be! There are many ways you can reduce how much you pay overall on that loan. We have the inside scoop for you on ways to cut those costs and keep more money in your wallet. I’m gonna break down how can you reduce your total loan cost nicely and simply here so you can get savvy on getting the best deal. Let’s dive in!

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Understand How Interest Works

The biggest factor in what you pay for a loan is the interest. Interest is the cost you pay to borrow money. It’s usually expressed as a percentage rate. The higher the rate, the more interest you pay overall.

Here’s a quick example: say you take out a $10,000 loan with a 10% interest rate. You’re gonna owe $1,000 in interest costs that first year alone. Now imagine if the rate was only 5% – you’d only pay $500 in interest! See how the rate makes a huge difference?

Knowing how interest works is key to getting the lowest rates possible on your loan. Make sure you understand how rates get calculated when you’re shopping around for the best deals.

Improve Your Credit Score

Your credit score is another major factor that determines what interest rate lenders will offer you. The higher your score, the lower your rate will likely be.

So take some time to boost your credit before applying for a loan. Pay all your bills on time, don’t max out credit cards, and correct any errors on your credit report. Even small improvements can equal big savings.

And know that different types of loans use different credit scoring models. Do your homework to know which scores lenders will look at for the loan you want.

Shop Around With Multiple Lenders

Never just accept the first interest rate and loan terms you’re offered! Take the time to get rate quotes from at least 3-5 different lenders.

Online lenders like SoFi, Earnest, and LendingTree make this easy by letting you check personalized rates without impacting your credit score. Compare national banks, local banks, and credit unions too.

With multiple quotes in hand, you’ve got leverage to negotiate a lower rate with lenders. Competition for your business can equal big savings.

Consider a Shorter Loan Term

The longer you take to repay a loan, the more interest you pay over time. For example, on a $300,000 mortgage:

  • A 30-year term at 4% interest costs $215,068 in interest payments.
  • A 15-year term at 3% interest costs $94,457 in interest.

So explore if you qualify for a shorter term. Even asking to shorten an existing term by a few years can make a difference. Run the numbers to see which term gives you the best overall value.

A shorter repayment period does mean higher monthly payments. Make sure you can afford it before committing. But in the long run, you save substantially on interest costs.

Make Extra Payments to Pay Down the Principal

When you make loan payments, most of that money goes toward paying accrued interest first. Only whatever is left over gets applied to the principal (the amount you originally borrowed).

Making an extra principal payment allows more of your money to go straight to reducing the principal balance. This saves on interest fees over time.

Even sending in an extra $100 or $200 when you can knock years off a long-term loan and cut interest costs big time. Auto loans and mortgages often don’t charge prepayment penalties, so take advantage!

Pay Interest Upfront (If Possible)

Some loans, like mortgages and car loans, give the option to pay interest upfront. So you pay 1 or 2 years of interest all at once at closing. This reduces how much interest builds up later.

Paying interest upfront doesn’t always make sense. Crunch the numbers to see if they add up based on your loan amount and terms. But know it’s a strategy that could save substantially over the life of the loan.

Avoid Fees However Possible

Extra fees add to your total loan costs. Lenders often charge fees like application fees, origination fees, prepayment penalties, late fees, and more. These can add up!

Always ask lenders to explain any fees and negotiate them away if possible. Choose lenders that offer low-fee or no-fee loan options.

And make sure you avoid behaviors that incur fees, like late payments or going over credit limits. Every extra fee equals money out of your pocket.

Make Bi-Weekly Payments to Cut Interest

Many lenders allow you to make bi-weekly (twice-a-month) payments instead of monthly payments. This gets money to the principal faster and reduces how much interest builds up.

Because there are 52 weeks in a year, bi-weekly payments equal 26 half-payments versus 12 monthly payments. Those extra principal chunks help! Run the numbers to see if it’s worth it for your situation.

Refinance If Rates Drop

If interest rates decrease after you take out a loan, refinancing to a lower rate can generate big savings. You basically swap your existing loan for a new one at a better rate.

Just make sure to account for closing costs so it makes sense financially. Also, know your credit score needs to be solid to qualify for the best new rates.

Good times to look at refinancing are when you’ve improved your credit score or the Federal Reserve cuts interest rates. But check periodically to catch any savings opportunities.

Pay Down High-Interest Debt First

If you have multiple debts like student loans, credit cards, personal loans, etc., make a plan to pay off the debt with the highest interest rate first. This minimizes how much you pay in interest overall.

The debt snowball method prioritizes paying small debts first to stay motivated. That’s cool too! Just know it costs more in interest overall. Do what keeps you focused while aiming to cut interest costs as much as possible.

Turn to Federal Loans Over Private

Federal student loans and small business loans usually offer lower interest rates and better protections than private loans. Rates are fixed instead of variable too.

So if you qualify for federal financing, take advantage! Having Uncle Sam as your lender can equal real savings.

Perkins, Stafford, and SBA loans are worth checking out. Just make sure you understand the terms – some federal loans don’t reduce payments based on income like private loans.

Avoid Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) seem attractive because they start with very low rates for a few years. But once the fixed period ends, the rate “adjusts” and can increase substantially.

Fixed-rate mortgages keep the same rate for the full loan term. Even if starting rates are slightly higher, having predictable payments and avoiding future spikes is wise.

Consider an ARM only if you know you will sell or refinance before the fixed period expires. And get clear on how high the rate could rise – being unaware can cost big time.

Weigh 15 vs 30-Year Mortgages

As mentioned earlier, opting for a shorter 15-year mortgage instead of a traditional 30-year reduces overall interest costs substantially.

But the higher monthly payments aren’t feasible for everyone. Make sure to consider your budget and financial goals before committing to a shorter term.

You can always get a 30-year loan and aim to pay it off in 15 years if possible. This builds in flexibility if money gets tight. But disciplining yourself to make extra payments takes serious commitment.

Either way – know both options to make the best long-term decision. Keep the end goal of reducing total interest front and center.

Know Your Loan Amortization Schedule

Loan amortization refers to the process of paying down both principal and interest over the full repayment term. Amortization schedules map out exactly how your payments get applied each month or year.

Studying how your amortization schedule works can reveal opportunities to pay more toward the principal earlier. This again cuts down on total interest costs in a big way.

Loan officers should explain amortization details to you when going over terms. If not, be sure to ask. Don’t sign anything until you understand the schedule.

Cloudy on Some of This Loan Lingo?

Loans come with a lot of terminology – APR, PMI, points, variable vs fixed rates…I get it can make your head spin! Here are quick definitions of key loan terms to know:

Principal – Original amount borrowed

Interest – Cost of borrowing money

APR – Interest plus fees are shown as the annual percentage rate

PMI – Private mortgage insurance required for loans with less than 20% down

Points – Prepaid interest charges paid at closing

Fixed-rate – Interest stays the same for a full loan term

Variable rate – Interest can change over the loan term

Common Questions on Reducing Loan Costs (FAQ)

Still, have questions on lowering total loan costs? Here are some frequently asked topics with my take:

Should I buy points to lower my mortgage rate?

Only if you know you’ll stay in the home long enough to recoup the upfront cost through interest savings. Calculate the break-even point to see if it makes sense.

What’s the best way to pay off student loans fast?

Pay off highest-interest private loans first while making minimums on federal loans. Then attack federal loans starting with the highest rate. Live frugally and devote windfalls to extra payments too.

Should I take a longer car loan term to get lower monthly payments?

Longer terms do reduce monthly costs, but they substantially increase your total interest paid over the life of the loan. Go with the shortest term you can afford.

Can I negotiate student loan interest rates?

Federal loan rates are set by law and can’t be negotiated. But some private lenders may negotiate if you have strong credit or access to a co-signer. Shop around.

Should I use a 401k loan to repay high-interest debt?

Only as an absolute last resort since you lose retirement growth. Try balance transfer cards, debt consolidation loans, credit counseling, etc first before tapping retirement funds.

Hope this gives you a solid game plan for reducing how much interest you pay on loans and keeping more money in your wallet long-term. Don’t get fleeced by lenders charging more interest than you need to pay. Now you’ve got inside tips to negotiate the best rates, make smart repayment moves, and slash your costs.

Putting these loan cost-cutting tips into action takes some work. But saving thousands in interest is oh-so-worth it. Now get out there and start saving!

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Ellie

I'm Ellie, a freelance writer with years of experience in the loan industry. Based in the United States, I founded cuploan.net, a loan finance blog providing expert advice and insights. I specialize in creating high-quality content promoting financial literacy and consumer rights to ensure fair and transparent lending access.

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