The total cost of your student loan debt isn’t just interest rate payments; it’s also the amount of time you have to work before using that money in other ways.
There are lots of ways how can you reduce your total loan cost, such as getting an income-based repayment plan so that you pay less per month and extending your repayment term from the standard ten years to 20 or 25 years. In this article, we will discuss the ways to reduce total loan costs.
8 Ways How You Can Reduce Your Total Loan Cost
Here are the ways how can you reduce your total loan cost.
Choose the right lender
Different lenders offer different interest rates and loan terms, so it pays to shop around.
If you’re looking for a home equity loan or line of credit, you may find that a traditional lender like a bank offers better rates than a non-bank financial institution.
If your goal is more flexibility in repayment options, online lenders—like “Quicken Loans site”—may be able to give you more choices.
Make extra payments every year
Paying down debt faster is one of the best ways how can you reduce your total loan cost. If you can afford it, make extra payments in a given year. Banks and credit unions won’t charge you for doing so, but those fees may add up if you pay multiple loans from a single institution.
It would help if you also looked into refinancing to save money on interest. You could shave years off your repayment period by taking out a new loan with lower rates or better terms than what you have now.
Understand your total cost of borrowing
One of your top considerations when deciding whether or not to take out a loan is how much it will cost you. To help you evaluate various loan offers and make an informed decision, you need to know about calculating your total cost of borrowing.
The total cost of borrowing is a calculation that factors interest rates, fees, and other expenses related to taking out a loan. It helps you determine if you are getting a good deal by comparing these factors side-by-side.
Start with the Monthly Payment
Before you even think about refinancing your student loans, you need to understand how much money you pay each month. If your interest rate is lower than 7%, it could be a good idea. If not, then keep reading!
Refinancing isn’t always a slam dunk and is often done by people who don’t need to do it—so make sure you know what will work for your financial situation. The most important thing to consider when deciding whether or not to refinance is your monthly payment amount.
The lower that number, the better off you are. For example, if you have $50,000 in student loan debt at 6% and can reduce your payments to $400 per month with a new loan at 3%, you should refinance.
Find a lower interest rate
If you’re paying off student loans, you’ll want to find a lower interest rate. If you have federal loans, look into Income-Based Repayment and Income-Contingent Repayment plans. This way, you’ll reduce your total loan cost.
These plans can reduce your monthly payments by 50 percent of your discretionary income. Keep in mind that these programs are only available for new borrowers—and if you make more than $50,000 a year, you may not qualify for them.
If you have private loans, contact your lender directly to see their repayment options. Many lenders will work with their customers individually to help reduce their monthly payments.
Use points to reduce interest rates
One way to reduce your total loan cost is to use points when applying for a mortgage. A point is equal to 1 percent of your loan value and allows you to reduce your interest rate by up to one percentage point.
Points can be paid upfront or financed, but they should not be considered trivial. For example, if you have a $200,000 home loan with an interest rate of 5 percent and decide to finance two points (or 2 percent), that’s $4,000 in additional costs over 30 years.
However, reducing your interest rate from 5 percent to 4.5 percent by paying two points upfront ($4,000) would save you $2,400 in interest payments over 30 years—and more than make up for the initial investment.
Choose a shorter term
When deciding on a loan term, consider that loans with shorter terms tend to have higher interest rates. While it might be tempting to borrow money for a short period at a low-interest rate, you’ll pay more over time because you’ll make multiple payments.
If you can afford to make larger payments, consider paying off your loan early and choosing a longer-term. This will help reduce your total loan cost.
Switch from fixed-rate to variable-rate loans
If you’re planning to finance a new home or car, you choose between two types of loans: fixed-rate and variable-rate. With a fixed-rate loan, your interest rate won’t fluctuate over time.
But with a variable-rate loan, your interest rate will change based on market conditions. Variable-rate loans are typically cheaper than fixed-rates in good economic times but can be more expensive in bad economic times.
However, if you expect rates to rise over time (as they historically do), it might make sense for you to take out a variable-rate loan instead of locking yourself into an expensive fixed-rate mortgage.