How can you reduce your total loan cost?

Sometimes you need to get from point A to point B, and a personal loan could be just the tool you need to get there. Maybe you're tackling a big car repair or you have high-interest debt you'd like to consolidate and pay off. Perhaps an unexpected bill falls in your lap, and you need cash to pay it. 

Whatever reason you need your loan, there's no reason to overpay for it. There are several effective strategies to cut rates and fees so you can reduce your total loan cost and save money.

Ready to make your money work smarter for you? Here are a few tips to help you avoid overpaying for your loan.

What determines your total loan cost? 

A loan's total cost is how much you pay the bank in total over the full term of your loan. It includes your principal amount—what you borrowed—plus any interest and fees charged over the loan term. 

If you know the details of a loan, you can calculate your cost to borrow before you commit. That's useful when comparing loans from different lenders. 

Let's look at what the key terms mentioned above mean:

• Principal. Loan principal is the amount you borrow. For example, you might get a $20,000 personal loan to consolidate debt. The $20K is your principal amount. 

• Interest rate. The interest rate determines the interest fees you pay. Interest fees are the cost a lender charges you to borrow the money. Interest rate, along with any other loan fees, both go into your annual percentage rate (APR). The APR measures your total cost to borrow over one year. 

• Loan fees. On top of interest fees, lenders may charge application fees, origination fees, or credit check fees when you apply for a loan. These fees could be taken out of your loan proceeds or added onto your loan balance.

• Loan term. Your loan term is how long you'll take to repay the loan, measured in months or years. Most personal loans have a term between two and six years.

A larger principal amount, higher interest rate, higher fees, and a longer loan term could all increase total loan costs. Borrowing less, getting a lower rate, paying fewer or no fees, and choosing a shorter term could reduce your total loan cost. 

Take a look at how interest rate and loan term affect the total of the same $15,000 principal: 

So, how do you reduce your total loan cost? Let's look at some of the most effective strategies. 

Make extra payments (even small ones) to lower total loan cost

Making extra payments is one of the most effective strategies when those added dollars go toward the principal. Interest is typically calculated monthly based on your principal balance, so the lower the balance, the less interest you're charged.

Even small added payments to principal could result in significant savings over the life of the loan. Plus, you could pay the loan off faster than sticking to the regular schedule. 

For example, take Loan 2 from the table above. Your regular monthly payment is $543. Now, let's assume you round up your payment to $600 per month. That extra $57 monthly payment could help you pay your loan off four months sooner and save around $575 in interest. 

And the same strategy could work with any loan. The more you can pay, the better your results will be.

Say you have a five-year $30,000 consolidation loan at 18% APR. Your monthly payments would be $762. If you could bump that up to $1,000 a month, you'd save $5,553 in interest overall and shave an impressive 19 months off your loan term. 

Tip: If you make loan payments online, you may have the option to add extra amounts to the principal. If not, then call your lender to ask how you can apply extra money to your principal balance. 

Refinance to a lower interest rate to reduce total interest costs

Refinancing a personal loan to a lower interest rate could reduce your loan costs if you keep the same loan term or choose a shorter one. When you refinance a loan, you take out a new loan and use it to pay off your old one. You then make payments to the new loan. 

Let's consider the same $30,000 consolidation loan from above. It costs $15,708 in interest fees with an 18% APR. But if that APR were 14% instead? Then you'd pay only $11,883 in interest fees—a difference of $3,825.

You need to be considerate of your loan term, however. If you're already one year into your five-year loan, and you refinance with a new five-year loan, you're essentially adding an extra year onto your total repayment time. This means an extra year of interest payments and less savings from the lower interest rate.

For instance, if you refinance a $30,000 balance into a new 14% loan, you'd save more than $2,500 if you refinance with a four-year loan instead of a five-year loan.

So, should you refinance to reduce total loan cost? It could make sense if you can:

• Get a lower interest rate than you pay now

• Refinance to a new loan term that matches the remaining time you have left on the loan 

• Don't get stuck with extra fees that eat up your savings

Loan fees can add to your refinance costs. If the new lender charges an origination fee, for example, that often comes right off the top of the loan amount and you may have to pay interest on it. Using a loan refinance calculator could help you estimate costs based on different loan terms, fees, and rates.

Shorten your loan term to save on total interest charges

When taking out a new loan—or refinance loan—the term you choose can have a big impact on the total cost. Longer loan terms mean more interest payments, which can raise your total loan cost. Plus, lenders often charge higher interest rates for longer loans.

In other words, a shorter loan term saves money on interest and potentially scores a lower rate. However, that does mean a higher monthly payment. You'll need to find more room in your budget to make sure you can afford the payments.

Here's how payments compare for the same $25,000 loan, with different repayment terms.

The goal is to find the shortest possible term that still gives you an affordable monthly payment. You need to be certain you can afford the loan payments for the full loan term to avoid a situation where you miss payments or even default on the loan entirely.

One way to compromise here may be to take a longer loan term, but then to make extra loan payments when you can afford it. Just make sure your lender doesn't charge a prepayment penalty for paying your loan off early.

Pay on time and use autopay for discounts

Late payments could increase your total loan cost before you even realize it. If your lender charges a late fee, that means you pay more. The more often you pay late, the faster the fees can pile up. 

On-time payments could keep your loan cost lower and there are some low-effort ways to ensure you pay by the due date: 

• Add payment due dates to your digital or paper calendar

• Set up payment reminders in your preferred calendar app, mobile banking app, or budgeting app if you use one

• Schedule automatic payments from your bank account

Autopay could help you save even more money if your lender offers a discount when you enroll. The discount may be small (0.25% to 0.50% is typical), but every penny counts when you're trying to be creative about reducing total loan costs. 

Compare lender offers before taking a personal loan

Your choice of lender can influence your total loan cost. Ideally, you want to work with the lender that's willing to offer you the lowest APR possible, based on your credit profile, income, and debt. That means a low interest rate and low or no loan fees.

A little research can shed light on just how much loan APRs vary from lender to lender. For example, a lender that prefers borrowers with excellent credit is likely to offer much lower rates than a bad credit loan lender. 

Tip: If you don't know your credit score, you can check it for free through FICO or Experian. 

How do you compare lenders and loan terms? You can get quotes without hurting your credit by using prequalification. This is when a lender uses a soft credit pull to give you an idea of what type of terms you might qualify for if you applied. It's not a guarantee of approval, but it helps minimize the hard credit pulls.

Then, plug rates and fees from different lenders into a loan calculator to find out how much each one will cost you overall. Compare the total cost and monthly payments from each lender to choose the best one for your budget and goals.

When it might be hard to reduce total loan cost

Sometimes you may need to keep paying down your current loan before you can make changes to cut costs. Situations that could make it difficult to lower loan costs include a higher APR, limited refinancing options, or little room in your budget to pay extra toward the principal. 

What can you do in these situations? Here are a few ways you may still be able to minimize loan costs:

• Work on your credit. Higher credit scores generally mean better interest rates, so increase your scores. Paying your loan on time each month could go a long way toward boosting your score over time.

• Choose a smaller loan. A simple way to cut loan costs is to borrow less in the first place. A smaller loan won't accumulate as much interest as a larger one. Borrow only what you absolutely need to meet your goals.

• Pay biweekly. Biweekly payments add one full extra payment to your loan balance each year. If you can't afford an extra lump sum every single month, switching to biweekly payments could still help you shrink your interest costs over time. 

You could also explore personal loan alternatives, but you should know what you're getting. 

Cash advance apps, for example, can put smaller amounts of money in your bank account almost instantly and some of them don't charge any interest or fees at all. However, you typically have to be able to repay the advance on your next payday. Traditional payday loans, meanwhile, can carry triple-digit APRs and should generally be avoided. 

Still interested in how to get a personal loan? Check your credit scores first, then calculate how much you need to borrow. Get loan quotes from multiple lenders via prequalification so you have an idea of what you might pay for different loans to help you choose the right one. 

If you're ready to get started, get personalized offers for loans through Achieve.