How to reduce your total loan cost

There are times in life when you might need a loan to get from point A to point B. Maybe you're ready to upgrade your car because your old one needs too many repairs. Or you have high-interest debt that you'd like to consolidate and pay off. Perhaps an unexpected bill falls in your lap and you need cash to pay it. 

Loans exist to help you manage these kinds of situations. If you need a loan, it's important to know how to lower your total cost, both before and after you borrow. You could get a smaller loan, for instance, or pay it off faster to save on interest.. 

Ready to make your money work smarter for you? Here are a few tips you can use to be savvier when it comes to debt.

6 ways to reduce your total loan cost before you borrow 

Whether it's a personal loan, home equity loan, or another type, you could improve your chances of getting a cheaper loan by getting ready before you apply. Here are a few ways you may be able to lower the cost before you borrow. 

• Boost your credit

• Get a smaller loan

• Enlist a co-borrower

• Choose a shorter term

• Shop around

• Negotiate

1. Improve your credit score 

When you apply for a loan, the lender will evaluate how likely it is that you’ll pay them back. One way they’ll do this—and determine your interest rate—is by checking your credit score. 

Your credit score is a three-digit number that offers a snapshot of how you manage debt. Credit scores range from 300 to 850, with 850 the highest score you can get. FICO scores, which are most often used by lenders, are based on these factors:

• Payment history (35%)

• Credit utilization (30%)

• Credit age (15%)

• Credit mix (10%)

• Credit inquiries (10%)

Lenders often use tiered pricing, which means different rates for different credit scores. If you have a higher score, you’re more likely to receive a loan offer and qualify for a lower interest rate.

To find out where you stand, talk to a lender who does a soft inquiry, which is a way for them to check your credit that won’t hurt your credit score. You want to find out whether you’re on the cusp of a score that could get you a better deal. If a lender offers a lower interest rate to applicants with a 720, for instance, and you happen to have a 715, you might want to research how to get over that hump and grab the lower rate.

Here are a few ways to improve your credit over the long term:

• Pay bills on time

• Keep credit card balances low compared to the account limits

• Routinely request credit limit increases on your credit cards (but don't use any of your new credit!)

• Keep older credit accounts open and consider making one small purchase every few months that you pay off in full

• Limit how often you apply for new credit

2. Borrow less 

Before you borrow, determine exactly how much money you need—and borrow only that much, no more. If possible, cut down your loan amount.

Borrowing less money could result in a lower origination fee, which is the lender’s fee for making the loan. The origination fee is typically a percentage of the loan amount. 

3. Add a co-borrower

A co-borrower is someone who applies for a loan with you and allows the lender to consider their credit history for approval. If approved, they sign their name to the loan documents alongside yours. 

A co-borrower could be:

• A parent

• Sibling

• Another relative

• Spouse or significant other

• Family friend

Adding a co-borrower to your loan application could help you get better terms if your co-borrower has a strong credit standing. For example, if you have a 620 credit score but your co-borrower has an 800 score, that could persuade the lender to give you a loan at a lower interest rate. 

There's one important thing to note. A co-borrower shares responsibility for paying back the borrowed money. You might agree between yourselves that only you will make payments to the loan but if you default for any reason, the lender could come after both of you to try and recover the debt. Late payments or collections related to the loan could also appear on both your credit reports. 

At Achieve, having a qualified co-applicant could get you an interest rate discount on a personal loan, saving you money on interest. Having a co-signer could also help you get a loan that you might not qualify for on your own. 

4. Take a shorter term

You might choose a shorter loan term to reduce your costs. Loans with shorter terms often come with lower interest rates than longer-term loans. Why? Because lenders assume that a shorter term means you're more likely to repay the loan on time, so they reward you with a lower rate. 

The faster you repay a loan, the less interest you pay overall. 

Take a look at the following example of simple interest on a $100,000 with varying term lengths and interest. 

Simple interest on a $100,000 loan 

This table is for informational purposes only. Interest rate and payments are for illustration. Individual results vary. This example uses the simple interest calculation method. Not all loan interest is calculated this way.  

Now, there's one caveat to know about a shorter loan term. Your monthly payments will be higher than they would be if you chose a longer term. So you'll need to be confident that a higher payment will fit comfortably into your personal budget. 

5. Compare loans

A loan, whether large or small, is a financial obligation, so it makes sense to research your options. Here are a few tips to help you compare loans and lenders. 

• Estimate your loan amount. Lenders can set minimum and maximum loan amounts. If you know what you need to borrow, that could help you rule out loans that don't match up with your desired amount. For example, if the lender's minimum is $15,000 but you only need $5,000, that rules them out right off the bat. The same would be true if the lender's maximum is $50,000 but you'd like to borrow $100,000. 

• Decide what kind of loan you need. Loans can be secured or unsecured. A secured loan requires you to put up collateral or something of value that you own. A  home equity loan is a secured loan, and your home is the collateral. Unsecured loans don't require collateral. You might prefer unsecured personal loans if you don't own a home or you don't want to tie any collateral to the debt.

• Look at more than just interest rates. A low rate might be your No. 1 goal when you need a loan, but consider what else a lender offers. For example, compare loan terms to see how much you might pay monthly, and check the fees that a lender charges. Also, consider whether the lender offers any benefits or perks, like an interest rate discount when you enroll in automatic payments. 

• Get a rate quote. Many lenders offer a free rate quote that won't affect your credit so you can estimate your loan costs. You can see what you'll pay with different loan terms and rates for the same loan amount to narrow down your final choice. 

Finally, you might talk to a loan expert about your situation and why you want the money. They can evaluate your needs and help you figure out which type of loan is best suited to your situation.

6. Negotiate your interest rate with lenders

On some loans, you can negotiate the interest rate. This may involve paying upfront fees to get a permanent rate discount (on a mortgage, it’s called buying mortgage discount points). But other times, it’s simply a question of nudging the lender to their best offer. 

For auto loans or credit cards, for example, the first rate you’re quoted isn’t the best one you qualify for. If you've applied for a loan, talk to the loan officer handling your application about a rate reduction. They may be open to a lower rate if you:

• Have good or excellent credit

• Had a loan with them in the past that you repaid on time

• Are able to put down a large down payment (in the case of a car loan)

• Can demonstrate that you have money in savings that could cover the loan payments if your income were to drop

Successful negotiations may sometimes hinge on timing. For example, car dealers may be under pressure to meet sales quotas closer to the end of the month. That could be a great time to get a deal on loan if they're motivated to move cars off the lot.

Unless time is of the essence, don't be afraid to step away from the bargaining table. You’ll be in a better position to negotiate if you can walk away from the loan offer and think about it for a while. If you wait until you really need the loan, you might find that it’s more convenient to take the first offer rather than wait for a better one.

6 ways to reduce your total cost on an existing loan

If you already have a loan, you could still reduce your loan costs. Here are six ways to do it:

1. Pay extra

2. Set up automatic payments

3. Refinance

4. Consolidate

5. Skip the fees

6. Ask for loan forgiveness

1. Make extra payments

You could pay your loan down faster and reduce interest costs when you make extra payments. 

Extra payments reduce the principal balance, or the amount you originally borrowed. Lenders calculate interest charges on the principal balance. When you chip away at the principal with extra payments, you accrue less interest over time. And you pay off what you owe faster. 

Use these tips if you plan to pay extra toward your loan:

• Ask your lender how to make extra payments that will be applied to the principal balance. Sometimes you have to specify every time you make an extra payment how it should be applied. 

• Also ask your lender if there is a prepayment penalty, which is a fee for paying off the loan early. If there is, only pay off your loan early if you'll save more money on interest than you'll be charged in prepayment fees.

• Make regular payments biweekly. When you split your monthly payments in half and pay every other week you effectively make one full extra payment per year.

• Use found money to pay down your loan faster. If you get a tax refund, a work bonus, or any other unexpected cash, you could use it to make a lump sum payment toward your balance. 

Whether you contribute a little extra or a lot, any additional dollars you throw toward your debt could help you save money. 

2. Set up autopay 

Many lenders encourage borrowers to set up automatic payments for their loans. There are some good reasons to enroll in autopay, which include:

• A discounted interest rate, if your lender offers this benefit

• No missed payments, since the money is automatically deducted from your bank account on the due date

• No late fees, which you might otherwise pay if you miss a due date

• No risk of damage to your credit score from late payments

A typical autopay rate discount is 0.25% but you'll need to check with your lender to see what's available. While a quarter of a percentage might not seem like a big deal, even a slight rate cut could potentially save you hundreds or even thousands of dollars over the life of the loan.

3. Refinance your loans

Sometimes, it makes sense to swap out your current loan for a new one. This is called loan refinancing. This could be a good idea if you:

• Qualify for a lower interest rate

• Would like to change your loan payment or terms

• Prefer to work with a different lender than the one you have now

How much you save on interest when you refinance is tied to your loan term. If you refinance to a longer term you may not save much in interest, even if the rate is lower. A refinance calculator can help you estimate your total loan costs for different rates and terms.

Also, consider what you might pay upfront to refinance. If the lender charges origination fees, application fees, or other upfront fees, it's important to add those into your calculations.You can use an online loan calculator or chat with a loan consultant to figure out the cost of the new loan and how it compares to sticking with the loan you’ve got. 

4. Consolidate your loans

Debt consolidation means taking a new loan to pay off existing debts. For example, you might use a personal loan to consolidate:

• High-interest credit card balances

• Medical bills

Other personal loans or unsecured loans that you owe. You could also use home equity loans to pay off debt or consolidate federal student loans into a single loan.  

While you might refinance debt primarily to lower your interest rate, debt consolidation is typically designed more for people who want to streamline their monthly payments. For example, if you use a personal loan to pay off five credit card balances you'd just have one loan payment to make each month. If you're interested in a debt consolidation loan, it's helpful to compare rates to see how much you might pay. 

5. Avoid unnecessary fees

Fees can eat into your wallet, and they're sometimes avoidable when you need a loan or line of credit. Some of the most common fees to watch out for include:

• Late fees. Lenders can impose late fees if you miss a payment due date. Autopay could help you avoid late payments and their associated fees. 

• Prepayment penalties. If you plan to pay your loan off early, your lender might charge a prepayment penalty. This fee helps them recover some of the interest they lose out on when you pay off your loan ahead of schedule. 

• Bill payment fees. Lenders may charge convenience fees if you use a credit card to make your loan payments. If that's the case, consider what other ways you can pay, whether it's an ACH debit from your bank account, a debit card, or a paper check. 

Review your loan agreement and schedule of fees to see what the lender charges. Then, consider how you can get around those fees. Enroll in autopay if possible to avoid late fees and choose a fee-free payment option. If there's a prepayment penalty, ask your lender if they'd agree to waive it or reduce it if you're ready to pay off your loan. 

6. Ask for loan forgiveness 

If you’re struggling financially, you might be able to lower your costs by negotiating with your creditors to resolve the debts for less than the full amount you owe. The remaining amount is forgiven, and you’d no longer be responsible for it. 

Debt resolution could help you handle unsecured debts like credit cards and personal loans. If you can show that you have a financial hardship that qualifies for debt resolution and can’t afford to fully repay your debts, your creditors may be willing to work with you.  

For example, you may qualify for debt resolution if you:

• Mostly owe unsecured debts, like credit cards, personal loans, medical bills, or installment loans

• Have at least $7,500 in unsecured debt that you want to negotiate

• Can commit to making deposits into a secure account each month, which is used to negotiate agreements with your creditors

• Have explored other debt solutions but need help to manage what you owe due to a loss of income or another significant change in your finances

A debt expert could evaluate your situation and help you decide whether debt resolution is a good fit. 

Tips for reducing loan costs based on loan type

Loans let you borrow money, but they don't all work the same way. For example, a personal loan is different from a student loan and a student loan is different from a mortgage. Here are a few tips to help you manage costs for the various loans you may need. 

• Personal loans. Check your credit scores and improve them before you need to borrow. Get rate quotes from at least three lenders and look for a lender that charges the fewest fees possible. 

• Auto loans. Consider a larger down payment so that you have less to borrow. Compare the dealer's financing rates to what you might pay for a car loan with your current bank. Choose a shorter loan term if you can manage a higher payment.

• Student loans. Only borrow the amount you need to pay for your education costs. If you need private student loans, consider having someone with good credit co-sign for you. Look for lenders that offer multiple rate discounts. 

• Mortgage loans. Consider a larger down payment and pay attention to mortgage rate trends. If you plan to get a home equity loan or HELOC, consider whether it makes sense to choose a fixed or variable rate, based on interest rates at the time. 

With any loan you have, consider what you can do to pay the balance off faster. And look into whether it may benefit you to refinance or consolidate debts if rates have changed since you took out the loan, or your credit score has improved. 

What’s next?

If you're looking for a loan…

• Check your credit score: Find out if your bank or credit union offers free access to your credit score so you can review yours and improve it if necessary. 

• Calculate your financial needs for the smallest possible loan: Review your finances to determine how much you need to borrow so you can look for a right-sized loan.

• Get rate quotes: Compare loan quotes from multiple lenders so you have an idea of what you might pay in interest and fees.

If you already have a loan…

• Try a DIY debt payoff strategy: Maximize the amount you pay each month toward your debts so you can pay them off as quickly as possible.

• Run the numbers. Use a loan calculator to estimate what you might be able to save if you refinance or consolidate your loan.

• Consider forgiveness. If you're unable to repay your loan because of circumstances outside your control, talk to a debt expert about whether you could resolve what you owe with your creditors.