How to Reduce Your Total Loan Cost

In an ideal world, you’d be able to borrow money and repay it with no interest. Unfortunately, it costs money to borrow money. And as you may have found out already, taking out a loan can be more expensive than you think.

Depending on your situation, you might be able to reduce the total amount you pay for your loan. Here’s a look at how to reduce your total loan cost.

What makes up your total loan cost?

Before we look at ways to lower total loan cost, let’s briefly review what actually makes up the total cost of your loan.

Principal

The principal is the amount of money you’re borrowing, exclusive of interest and other fees.

Interest

The interest is the amount you pay the lender to borrow money. It’s usually expressed as a percentage of the total principal amount.

Fees and other charges

Many loans come with at least some fees. Examples include:

• Origination Fee: Covers the basic administrative cost of creating the loan
• Application Fee: A charge to process your application
• Late Fee: An extra charge if you make a payment after the due date
• Prepayment Penalty: A fee assessed if you repay the loan early

When comparing different lenders, you might see the annual percentage rate (APR) for different loans. The APR includes the interest rate and fees, and it’s represented as a percentage. Because it includes fees and interest, the APR is intended to give you a clear idea of the annual cost of borrowing money.

How to reduce your total loan cost

There are several potential ways to lower total loan cost. Here are a few worth knowing about.

Make extra payments toward your principal

If you can afford to make more than the minimum payment toward your loan, you might consider making additional principal payments.

Most loans are amortized, meaning each of your monthly payments goes partially toward interest and partially toward the principal. When you make an additional principal-only payment, the entire payment goes toward the principal, or the actual amount you borrowed.

Principal-only payments can save you hundreds or thousands of dollars in interest over the loan term, and they may also make it possible to pay off your loan faster.

Refinance to a lower interest rate

The lower your loan’s interest rate, the less you’ll end up paying over time. In some cases, you may be able to refinance your loan for a lower interest rate. There are two main scenarios where this might make sense:

• Your credit score has increased significantly since you took out the loan
• Market rates as a whole have decreased since you took out the loan

Before you refinance, see if you can get pre-approved for loan offers. Many lenders will tell you your interest rate and other loan terms without doing a hard pull on your credit, which can affect your score.

Choose a shorter loan term

Longer loan terms tend to be riskier for lenders. With a longer term, there’s a greater chance that something could happen that compromises your ability to repay.

This means that, all else being equal, a shorter loan term will usually have a lower interest rate. Shorter loan terms come with higher monthly payments, so you should make sure you can comfortably afford these higher payments before choosing a shorter term.

Avoid fees and penalties

If you aren’t careful, you could end up owing a significant amount in fees and penalties. Late fees are probably the most common. Some lenders charge a flat amount (usually around $10–$30), while others charge a percentage of the loan balance.

Any time you take out a loan, you should review your loan document thoroughly to ensure that you understand the possible fees and penalties.

Make biweekly payments instead of monthly

At first, this might seem like it wouldn’t make much of a difference. However, if you make biweekly (twice per month) payments, you’ll make the equivalent of 13 monthly payments over the course of the year.

As long as your loan doesn’t penalize you for early repayment, paying it off even slightly early could save you a big chunk in interest.

Set up autopay for a rate discount

If you’re not sure how to reduce your total loan cost, setting up autopay is a fairly easy way to do it. Many lenders will offer a slight interest rate discount to borrowers who put payments on autopay. This is generally a good idea, and it can also help ease any anxiety you have about missing payments.

Improve your credit score before borrowing

Your credit score isn’t just a number. It’s designed to show lenders how risky you may be to loan money to. The lower your credit score, the more risk you pose to the lender.

To offset the risk of lending to you, lenders will usually offer you higher interest rates. And with a high interest rate, you’ll end up paying more over time.

Ready to improve your credit?

Whether you’re hoping to take out a new loan or want to refinance an existing one, increasing your credit score is one of the best ways to lower total loan cost. However, if you’re like most people, you might not know how to get your credit from where it is now to where you want it to be.

Kikoff takes the guesswork out of credit building. We connect users with lines of credit, rent reporting, and other tools to help them rebuild credit or establish it for the first time.

Joining is free, and we don’t check your credit. Download the app to get started today!