10 Ways to Reduce the Cost of Student Loans and Other Debt

  • Looking at many different lenders and comparing terms can help you find the best rate.
  • Make more than the minimum payment each month and try to make extra payments if possible.
  • If you’re looking for a student loan, prioritize federal options before getting a private loan.

If you have to borrow money to pay for something like your car or your schooling, you want to make sure that debt is as affordable as possible.

Whether you’re looking to cut down on the cost of your student, personal, autoor any other type of loan, we’ve got 10 key pieces of advice to make sure you’re paying the lowest amount possible.

1. Shop around and compare offers

You can check the rates that many different lenders will offer you by filling out simple online applications that should only take a few minutes to complete and won’t affect your

credit score

. You may also use a loan marketplace to compare many offers at once with a single application.

Taking the time to survey a range of options pays off. A study from SuperMoney.com analyzed 160,000 loan offers to over 15,000 borrowers and found that the average difference between the highest and lowest APR offer for the same borrower was 7.1 percentage points.

“Just accepting the first loan offer you qualify for can be an expensive mistake,” says Andrew Latham, a CFP® professional and the managing editor of SuperMoney.com. “The data suggested that comparing multiple lenders can save you more money than increasing your credit score by 100 points when it comes to finding the best APR.”

2. Pay early and often

If you have the financial flexibility to make extra or early payments on your loan, you should do so. The more additional payments you make toward your loan, the quicker the balance will decrease and the less you’ll pay in overall interest.

Most lenders don’t charge any penalty for paying off your loan early, and you could cut months or even years off of your term length with consistent extra payments.

3. Make more than the minimum payment each month

Making the minimum payment each month probably won’t do much to reduce your overall debt, because most of your money will go toward paying down the interest first, especially on high-interest loans. Making higher monthly payments will reduce your debt more aggressively and give less room for interest to balloon.

However, if the choice is between making the minimum payment or making no payment at all, pay the minimum. This way, you’ll keep your credit score in good shape.

4. Consider a variable-rate loan

Variable rates change periodically throughout the life of your loan and they generally start lower than fixed-rate loans. While you run the risk of your loan rate going up during its term, you also may benefit from a rate drop.

Paying off your loan fast enough may negate the locked-in rate aspect of a fixed loan, because you’ll enjoy a lower rate to start.

5. Refinance your loan

If your credit score, income, or financial situation in general has improved since you first took out your loan, you may consider refinancing to take advantage of more favorable terms. This could include a better rate, more accessible customer service, and a different term length.

However, be very careful before you refinance federal student loans, as you’ll lose key protections in the process. For instance, you wouldn’t be eligible for the COVID-19-related student loan payment pause.

6. Put bonuses, tax refunds, or gift money toward your debt

While putting extra cash toward your debt might not seem like the most exciting idea (and you should definitely save some of it to do something nice for yourself) an unexpected windfall can supercharge your ability to pay down your debt quickly.

You aren’t always able to plan for how much money you’ll receive, but if you have an idea (let’s say your company gives annual $1,000 holiday bonuses), you can budget a certain portion to go toward your debt. The exact percentage you allocate doesn’t matter, as every little bit helps.

7. Sign up for automatic payments

Many lenders offer discounts for borrowers who sign up for automatic payments. While a discount of .25% or .50% may not seem like much, the reduced rate adds up in the long term.

Plus, signing up for automatic payments ensures you won’t miss payments, which would hurt your credit score and could disqualify you for future loans.

8. Choose a shorter term length

When deciding on your loan terms, you’ll usually have a choice between a shorter and longer term length. This varies based on loan type, and we’ve listed the general timeframes below:

  • Student loans – five to 20 years
  • Auto loans – one to seven years
  • Personal loans – one to 12 years

If you choose a shorter term length, your monthly payments will be higher, but you’ll pay less in overall interest, saving you on the total cost of the loan.

9. Prioritize federal options for student loans

Federal student loan options often have lower rates and better protections than private loans, so they’re a good option to reduce overall loan costs. Federal student loan relief programs like Public Service Loan Forgiveness can help you get all of your loan debt forgiven if you work in the public sector and make qualifying monthly payments for 120 months.

To avoid student loans altogether, see what federal aid you qualify for in the form of grants, scholarships, and work-study, all of which don’t have to be repaid.

10. Don’t allow interest to capitalize on your loan

Capitalized interest is unpaid interest added onto your loan balance after periods of nonpayment, including forbearance, deferment, and after your grace period. This will increase your overall loan balance, and you’ll later pay interest on that higher amount, increasing the total cost of your loan.

While loan forbearance can help you get back on your feet if you’re facing financial hardship, keep in mind that interest will usually continue to accrue. So the longer you wait to begin repaying the loan, the more it’ll cost you in the end.

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