Cut Private loan costs: Get a low rate and pay it off fast
Comparing loan applications feels like tedious work until you realize that taking a few minutes to compare your options will save you thousands of dollars. It’s amazing how most people will agonize for hours over buying clothes or electronics, but when it comes to loan shopping there is no effort. Learning about what’s available is simple and you will not need a finance degree to figure it out.
It’s easy to use a loan calculator online to quickly compare loan applications. Determining what your monthly payment would be is a good start. But when dealing with a private loan you will be faced with variable interest rates that can change year to year. This is why you need to zero in on debt elimination as part of your plan.
The three most important areas of consideration when comparing loans are:
The interest rate
The repayment term (10 years, 15 years etc)
The total cost of repayment
Rule of thumb is that the lower the rate, the less the loan costs. However this depends on how long it takes you to repay the loan. A lower rate loan that takes more years to repay could end up costing a lot. This is when a loan calculator comes in handy. The following will help illustrate some scenarios you can encounter. I used a loan calculator on Mapping Your Future for $10,000 loans with ten and fifteen year repayment schedules and 8% or 5% interest respectively.
|Loan Amount||Interest Rate||Years||Monthly Payment||Total Repaid|
Think of the big picture; what will this loan cost to repay in full?
As you can see, the loans with a 15 year repayment schedule had lower monthly payments but ended up costing the most to repay. A low monthly payment might be helpful to fit in your current budget but you unknowingly keep yourself in debt for too long and waste thousands of dollars on interest. Many borrowers are more concerned about the monthly payment than anything else, as they want to control their budget to have extra money available for other spending, but using this logic may lead to making only minimum payments each month and can increase the total cost of repayment. When comparing loan options, you need to know what the total cost of a loan will be after you finally pay it off. The loan that costs you the least amount to repay is probably the best one for you.
If you want to accelerate your debt freedom, look for a loan that does not have a pre-payment penalty. A prepayment is when you pay more than the standard monthly amount due towards the balance getting yourself out of debt faster.
Ken’s Tip – If you are taking out loans to go to college you need the right tools to make the right decision. Fortunately, loan calculators are readily available on the internet. Smart debt management starts with choosing the right loan. Trying to keep a low monthly payment will end up costing way more to repay. Focus on the total cost of repaying the loan and choose the one that costs you the least.
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