The cost of a loan always includes interest. In addition, setup fees and monthly newspaper fees may apply. All these costs together during all the years that you pay off on the loan constitute the total cost of the loan. It is important to look closely at this figure and not just look at the expenses for interest and amortization per month. By collecting loans, costs can sometimes be lowered. The total cost is what you pay instead of paying cash today.
A little every month gets a lot over time
An average private loan (around $100,000) runs on average 7-8 years with an average interest rate of 7%. This gives a monthly cost of around $1500. It is a cost that most people have no problem paying and a cost that is not experienced as great in comparison to the advantage of getting $100,000 in cash right away.
However, this small monthly cost (interest and amortization) becomes large sums over the entire term of the loan.
Example: The interest cost for a loan of $100,000 that runs at 7% interest over 8 years will be $29,859. If newspaper fees are added, the total cost will be even higher. So you pay close to $30,000 to get $100,000 paid today.
If you have a poor economy, and may even be burdened with payment remarks, you will be forced to pay a significantly higher interest rate, probably up to 25%. In such a case (if you can now at all borrow with a payment note) the interest cost will be $115 509, that is, more than twice the amount of the loan itself. In addition, the loan amount itself must also be repaid through repayments.
Most lenders with websites online can easily see examples of both monthly cost and total cost for different loan amounts and maturities. So you don’t have to do any complicated calculations on your own. However, you should note that this is just an example. The interest rate you are offered, and what monthly cost you receive, is always determined in an individual examination.
How to lower the total cost directly
To pay more than twice as much as the loan amount in interest only in one of the above examples is probably not so attractive. Overall, you probably want to bring down the total costs as far as possible. You basically have three options to use, namely:
- Borrow a little less than you intended
- Enter a shorter payback time
- Compare interest rates and choose the cheapest option
A smaller amount in terms of short term loans gives lower interest costs. Therefore, it may be an idea to think carefully about exactly how much you need to borrow. Every thousand dollars you can cut in the loan amount gives quite a big effect over time. The repayment period is also central. If you choose a longer maturity, you will, in total, pay more in interest against the fact that your monthly cost will be lower. The total cost can actually be several thousand dollars higher.
Finally, it is obviously not a stupid idea to compare different lenders and different offers. Different lenders have different price levels and the reason is basically the requirements for creditworthiness and ability to pay they set up. Going through a loan broker is a simple and easy way to quickly compare offers. If you want to know more about creditworthiness, please see our loan guide.
This is how you lower interest costs on an existing loan
The possibilities of negotiating lower interest costs with your current lenders should be very small. You may be able to do so if the lender is a complete bank and you are looking to add further commitment, but the probability is small. In order to hedge interest costs on an existing loan, there are two other ways to go, namely:
1. Pay off more on the loan
2. Compare private loans and switch to other lenders
Through repayments, you reduce the so-called capital debt. Each time you repay, the debt on which interest is calculated decreases. This reduces the total interest cost. If you have the opportunity to make extra payments now and then, you can greatly influence the costs.
As with new subscriptions, you can also compare offers when you have an existing loan. If you are able to get a lower interest rate with another lender, moving your loan is usually an easy thing. The new player can usually help with all the practicalities.