When you borrow a loan to pay for large purchases like a car, house, or home remodeling, you may be paying more than you should due to fees and interest rates. The good news is there are several strategies that can help you minimize the total cost of your loan.

Loans can help you finance some of the most important purchases in your life, such as your education, home, or car. If you're thinking about applying for a loan, it's important to understand the total cost of the loan so you can make an informed decision about whether the debt is affordable.

Understanding how you can reduce your total loan costs can also help you make sure that you’re paying the lowest possible amount. 

10 Steps To Reduce Your Loan Costs

Before borrowing a loan, compare your options and read the terms and conditions carefully. Consider following these ten steps to reduce your total loan costs.

1. Understanding Your Loan Terms and Conditions

Before you take out a loan, review the documents carefully to make sure you understand your repayment terms. Doing so can help you understand some of the common elements that may impact the total cost of a loan. These include:

  • Principal: This is the amount that you originally borrowed.
  • Interest Rate: This is the rate the lender charges to provide you access to the loan funds.
  • Fees: These can be any additional charges for borrowing funds, such as payment processing fees and loan origination fees.
  • Annual Percentage Rate (APR): This is the total cost of borrowing and includes interest charges, fees, and any additional charges.

Understanding these terms will help you evaluate all the factors that may increase your loan costs.

Example

When reviewing the terms and conditions of the loan you’re borrowing, you may notice that there are several fees that drive up the total cost, such as loan origination fee, prepayment penalty, and application fee.

2. Refinance Your Loan

Refinancing your loan works if your financial situation has improved or when interest rates have dropped since you borrowed the funds. In situations like these, you can refinance with a new loan at a lower interest rate.

Interest rates can change due to shifts in economic conditions. Refinancing your loan may help you benefit through lower interest rates or by changing the loan duration. There are several different types of refinancing options available to choose from, including:

  • Cash-Out Refinancing: This type of refinancing can be used when the asset you have used as collateral has appreciated in value. You can use cash-out refinancing to benefit from a lower interest rate.
  • Rate and Term Refinancing: This is a common option for borrowers who want to reduce total loan costs. Rate and Term Refinancing happens when you pay the original loan amount and replace it with a new loan that has a lower interest rate.

Other types of refinancing options include consolidation refinancing and cash-in refinancing. All of these options may help you reduce your total loan cost, but your options will depend on your lender and the type of loan you took out.

Example 

You have a personal loan with an interest rate of 20%, a balance of $10,000, and a term of 24 months. Your credit score has improved recently, and you qualify for a new loan at an interest rate of 12%. By refinancing the loan for 24 months, you can expect to save almost $1,000.

3. Make Extra Payments

One of the best ways to minimize total loan costs is by making more than the minimum payment each month. This will not only help you pay down your total balance faster, but it will also help you save money in interest payments over the term of the loan.

Teresa Dodson, CEO and Founder of Greenbacks Consulting Inc., says, "The biggest mistake consumers make is getting caught up on the monthly payment amount." Instead, she suggests consumers "look at the total loan amount and the interest you’re paying on that loan.”

If your lender allows, you can opt to make lump sum extra payments whenever you have extra money. While it may not seem like a lot, over time, you may be able to save thousands of dollars. Before you decide to make extra payments, it is important to check the loan terms to ensure there are no prepayment penalties or other fees associated with doing so.

Example

You can save money in multiple ways, for example, by rounding up your payments. If your loan payment is $1,345 monthly, you can pay $1,400 or $1,500 instead.

Other ways to make extra payments is by making biweekly payments instead of monthly. You can also use any bonuses and tax refunds you receive to pay down your debt.

4. Negotiate with Your Lender

Most borrowers believe they must accept the interest rate a lender offers them. However, that’s not always the case. It never hurts to ask a lender if they're flexible on interest charges. Here’s how to negotiate for the best rates from your lender:

  • Know your credit scores, financial situation, debt-to-income ratio, and credit history. You’ll be in a stronger position to negotiate with your lender if your credit is strong.
  • Get quotes from multiple lenders and compare them.
  • Gather quotes from different types of lenders, such as national banks, online lenders, and credit unions.
  • Show your lender an offer from a competitor and negotiate to match it or agree to a better rate.

Example

You pre-qualify for a personal loan with three different lenders. The three quotes you receive are for interest rates of 7.99%, 9.95%, and 13.95%. You approach the lender that initially offered you 9.95% and show him the competitor’s offer. After negotiations, the lender agrees to offer you a rate of 7.49%.  

5. Consolidate Your Debt

Debt consolidation refers to rolling multiple debts into one consolidation loan or a balance transfer credit card at a lower interest rate. You can use the proceeds from the new loan to pay off your existing loan balance on loans with a higher interest rate. Loan consolidation works best when you have multiple loans or high-interest credit cards.

As of June 2023, the average credit card APR was 24.12%, potentially adding thousands of dollars to your loan payoff amount. If you've accumulated a large balance on multiple credit cards, getting a debt consolidation loan at an interest rate as low as 10% can save you a considerable amount in interest charges.

Loan consolidation may be a good idea for reducing your total loan costs if you have a credit score of 700 or higher to qualify you for a lower interest rate credit card consolidation loan or a 0% APR balance transfer credit card. If you opt for a balance transfer credit card, it's important to pay off your entire balance within the introductory period to avoid interest charges.

Example

You have three credit cards with outstanding balances and you replace them with a personal loan at a lower interest rate.

  • Credit card 1: $10,000 balance, APR 17.99%, monthly payment $260
  • Credit card 2: $7,500 balance, APR 19.99%, monthly payment $190
  • Credit card 3: $6,500 balance, APR 18.99%, monthly payment $180

You take out a personal loan of $25,000 with an APR of 11.21% for a term of 60 months. This allows you to save $6,833 in interest charges.

6. Avoid Late Payments and Fees

You may incur penalties and fees for a number of reasons, such as application charges, account maintenance fees, and payment processing fees. But the most common reason why your total loan costs may go up is because of late fees.

Late fees are charged when you miss a payment deadline. The late fee will typically be added to the statement next month, and you may have to pay additional interest charges because of the late fees.

One of the simplest ways to lower loan expenses is by making sure that you always pay on time. Here are a few strategies to help you stay on top of your payments:

  • Set up autopay on your bank account. Automatic payments will ensure you never miss a payment.
  • Create reminders on your calendar for all payment deadlines.
  • Make a budget to help you prioritize your most important financial obligations.
  • Borrow only what you need and have a repayment plan ready so you're not stretched too thin.

Other than late fees, you may also want to avoid loan forbearance or deferments. These result in capitalized interest, which can again drive up your total loan costs. Any unpaid interest will be added to your principal and will accrue interest.

Example

You’re consistently late in making payments on your credit card, which results in a late fee of $30 each month. You setup autopay to avoid this, allowing you to save $360 each year in late fees. 

7. Consider Alternative Loan Options

Shopping around for loan options and comparing offers may also help you save money and keep the total loan costs low. Depending on the type of loan you're looking for, you may find a wide selection of lenders and loan options to choose from.

For example, if you're trying to secure a mortgage, you can compare different options, such as conventional loans and government-backed loans. You can also approach different types of lenders, such as mortgage brokers, online banks, private lenders, credit unions, and local banks. The same is applicable for auto loans and personal loans.

When comparing loan offers from different lenders, be sure to compare factors such as:

  • Loan APRs 
  • Interest rates 
  • Repayment terms 
  • Fixed rates or variable rates
  • Any applicable fees 

Although it may seem like most loan products are the same, in 2023, the difference between the lowest and highest APR offers was 7.1 percentage points for a personal loan.

Example

You’re in the market for a personal loan and compare options from online lenders and traditional banks. The best offer you receive is for an APR of 14.99%. You’re a member of a credit union and apply for a personal loan there and receive an offer for an APR of 9.99%.

8. Choose the Right Loan Term

You can also lower your monthly loan payments or reduce your total loan costs by choosing the right loan term. With a longer loan term, your monthly payments will be lower, but your total loan costs will go up over the life of the loan.

It’s important to find the right balance between the overall cost of financing and the need to keep your monthly payments low. The best loan term for you will be an affordable monthly payment, the shortest term, and the lowest overall cost. Loans with shorter terms typically have lower total costs because you will pay less interest over fewer months.

A shorter-term loan can be a good choice if:

  • You want the lowest total loan cost.
  • You want to pay off your loan faster.
  • You can afford the higher monthly payments.

Example 

When you borrow a personal loan of $10,000 with an APR of 12.99% for 60 months, your monthly installment is $227.48 but you pay $3,648.77 in total interest. 

Borrowing the same loan for a term of 24 months will result in a monthly payment of $475.37 but you’ll only pay $1,408.91 in interest.

9. Understand Prepayment Penalties

A prepayment fee is charged when you pay off part or all of your loan ahead of schedule. The fee will be outlined in your loan documents and may be allowed on loans such as personal loans, investment property loans, or conventional mortgages. Typically, prepayment fees start at 2% of your outstanding principal balance.

Typically, non-bank and online lenders and those specializing in subprime or bad debt loans charge prepayment penalties. Here are a few ways to avoid prepayment penalties:

  • Avoid refinancing frequently because it shows lenders that you are likely to refinance if the rates fall. 
  • Offer a higher down payment to negotiate better terms. Find a co-signer in exchange for receiving better loan terms, including no prepayment fees.
  • Ask your lender to provide you with a quote for a similar loan without prepayment fees so you can compare your repayment options. 

You can always compare offers from different lenders to find one that does not include prepayment penalties.

Example 

You’re borrowing a loan of $25,000 and compare loan offers from three different lenders. You find an offer that has no prepayment penalty, allowing you to bring down the total cost of the loan in case you decide to repay the loan earlier. 

10. Paying Attention to Hidden Fees

The total amount you pay towards your loan may also be higher because of hidden fees such as late fees, credit insurance, prepayment penalties, application fees, and origination fees. Spend some time understanding these costs to help you figure out the true cost of borrowing. Once you know what type of fees may be charged by a lender, you’ll be in a better position to spot those fees and avoid them.

Another easy way to find out how all of these hidden charges and fees add up is by looking at the loan APR. The annual percentage rate reflects the total cost of a loan because it includes the interest rate plus other fees, such as application and origination fees.

Example 

You’re comparing two different loan offers for a personal loan. You read the terms carefully and realize that one loan offer includes application fees, origination fees, and prepayment penalty. The other lender is offer a no-fee loan so the APR is much lower.

You Can Reduce Your Total Loan Cost

Loans can provide you with the funds you need for large purchases, but borrowing can get very expensive. To reduce your total loan costs, it is important to understand the terms of the loan and compare different offers, so you’ll know exactly how much you will pay. 

If you can take certain steps, such as staying on top of your bills, refinancing, and improving your credit scores, you're on your way to saving money.

If you have a lot of debt and are finding it challenging to repay your loans, contact the experts at TurboDebt. We're a reputable debt relief company committed to helping clients find a way out of debt through strategic planning and advising services. 

We can also aid you in finding a debt relief program that's right for you. Connect with us for a free consultation today.

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