Wed. Apr 17th, 2024

Inflation is ever stressful and often an increasing factor in a person’s life, making it challenging to manage everyday financial obligations. That’s particularly since the price points for necessities continue to rise, causing more money to go.

Not to mention the desire to make investments to prepare for the future, including retirement, and the occasional need to make significant purchases for comfortability in living.

The ultimate sacrifice is the lack of a savings or emergency fund. Loans tend to be the answer when needs arise, substantial purchases like a home, auto, appliances for the home, or perhaps help with medical expenses, taking a much-needed vacation, or varied costs.

Something to remember is the loan will add to those monthly obligations with an interest rate that needs to be considered. That will add to the overall cost. There are methods for bringing down the price of a loan, including the option of restarting it; check outån/ for details.

Borrowers have the option of negotiating with lending agencies or evening changing loan providers altogether in an effort to lower the interest rate, which could reduce rate. Let’s look at loans and how these can become a bit more expensive in uncertain financial times.

How Can A Borrower Use Refinancing To Decrease The Cost Of A Loan

When times are uncertain, monthly obligations can become challenging to navigate while attempting to accumulate savings. Usually, the sacrifice is the savings leaving people vulnerable when an emergency or need comes along.

It becomes necessary to take a loan to accommodate the expense. That’s whether it’s purchasing a home, or auto, paying for medical expenses, taking a vacation, or simply helping with some obligations.

The critical thing to remember is the extra monthly repayment will add to the monthly obligations unless there’s a consolidation. It is possible to keep that monthly expenditure to a manageable level.

That’s whether you need to negotiate with the lending agency or refinance at some point to lower the interest rate. Check out a few ways to decrease the cost of your loan product.

●    Pay a more significant down payment

When making a purchase, the down payment is the upfront amount owed, equating to a percentage of the item’s total price. The interest calculated on the loan is often determined based on the borrowed sum and other variables decided by each vendor.

The greater the total balance, the higher the interest payment and the more significant the “EMI.”

The suggestion is to pay as much of a down payment as you’re able to accumulate in order to bring these totals down. Usually, for a mortgage, the percentage for a down payment suggested is 20%.

That’s already relatively high. But for auto loans or other types, putting down as much as possible will eventually save great expense.

●    Opt for an extended term for repayment

The term determined for a loan along with the balance will determine the “EMI.” If a borrower decides to extend the term, there will be less due with each monthly repayment. The downside is that the interest will accrue for a more extended period creating a greater expense for the overall loan’s cost.

The suggestion is to avoid this if you can afford the monthly cost to save money, especially if the interest rate on the product was higher than you anticipated. That is until you’re able to refinance for a lower rate.

If you need to make credit or financial improvements, you can do so within a few months with diligent effort. With an improved credit profile, lenders will look at you more favorably, likely lowering the rate and the cost of the loan and, in turn, the EMI.

●    Take a loan as a valued customer with your existing bank

Despite your credit or financial profile, the financial institution you traditionally do your banking with is familiar with your history and reputation, making it an ideal option for purchasing your product.

The lender will be more apt to take a risk considering your time as a client and could be generous with the interest rate.

Often, they’ll overlook a less than favorable credit score if they’ve had access to a more favorable banking history over the years. It will also look better if you keep a steady balance and haven’t had any negative occurrences like returned checks or overdrafts.

When you’re a preferred customer, there’s a greater opportunity to negotiate for a reduced rate on the loan if the initial option is too high. A bank will be more willing to negotiate the rates with a client considered a valued member of their bank.

Doing so will not only improve the customer’s loyalty but has the chance to draw in other clients serving the institution in a marketing capacity.

●    Compare lenders to ensure the best deal

When you decide to refinance your loan for a better rate, your existing traditional bank could be the staunchest against refinancing. You’ll then need to shop lenders to find the best deal.

There are a vast array of loan providers in the market. Since rates continue to drop and perhaps your credit profile is improving, maybe your financial situation is getting better as well; you will likely do much better than with the initial rate.

Even with refinancing, however, fees and charges can be attached to the loan. It’s vital to ensure that the provider you work with has minimal, if any. Depending on the loan provider, these can include processing charges, origination fees, prepayment penalties, and others.

The addition of fees can make the overall loan expense greater despite a reduction in the interest rate. It’s also essential to find out what your existing provider might decide to charge if you choose to close out your account and move to a new lender.

●    A balance transfer loan could be the answer

Some people choose to take a balance transfer loan. These are essentially credit cards with a low-interest introductory period, usually 0%. The idea is to transfer balances from other higher interest credit cards onto this credit card that you’ll make repayments toward during that 0% introductory period.

The catch is that the time frame is restricted to merely roughly 12 months, sometimes a bit longer. It’s essential to ensure the balance transferred to the card is reasonably payable within that period.

Otherwise, you’ll be subjected to the interest that kicks in after the introductory offer, and it can be significant, creating more debt and an almost “starting over” point for you.

Another potential with this option is if borrowers are paying on their balance transfer card plus continue using their high-interest credit card, developing a great loop of debt that will be challenging to break free from.

●    Save money by paying off the highest interest obligations

Suppose you already have a personal loan along with other monthly obligations, including high-interest credit cards and everyday expenses. In that case, the suggestion is to work diligently to pay off the highest interest obligations first to make the most impact in reducing the monthly costs.

That would involve picking the bill with the highest interest and dumping the most money on that specific bill until it’s paid in full and then focusing on the next one until these are gone.

If you find it too time-intensive to take this path, debt consolidation could be a more feasible option. That would involve refinancing the current personal loan but requesting additional funds to handle the high-interest debt you’ve since accumulated in addition to the loan.

In this way, you can get all the expenses into a single fixed payment with one interest rate and set terms for when these will be paid.

Again the problem with this, like the balance transfer, is the likelihood of continuing to use the credit cards after the new loan is obtained, creating a fresh mound of obligations you struggle to handle. It’s a new cycle of debt with the need for a financial solution yet again.

●    Prepayment can help reduce the cost of a loan

When you choose to refinance and hopefully have no prepayment penalties in the agreement, a method for significantly decreasing the overall cost of the loan is a partial repayment of the product.

If you come into cash like bonuses or other lump sums of money, it’s wise to dump these into the installments. The more you do this, the faster the loan will be paid and the sooner you’ll be free of the monthly obligation, freeing up expenses to focus on other necessities.

In this scenario, if you don’t create more debt and get rid of an expense, it could be possible to develop savings. In that way, it might not be necessary to have to take a loan when needs arise in the future.

Final Thought

With inflation, the cost of living has significantly increased, making it exceptionally expensive to purchase everyday necessities, making people struggle to afford standard monthly obligations, let alone create savings.

Most take loans of one type or many to comfortably have a home, auto, appliances, or other basic needs or even wants like vacations, big weddings, beautiful furnishings, and on.

The priority for borrowers is to ensure these loans fit with their expenditures so they can comfortably afford to pay them. That means keeping them as low-cost as possible.

As we’ve shown, there are several ways to make that attempt, but the priority is ensuring you don’t create more debt while taking a loan or refinancing one. Doing so will not only produce much more cost in the end but will put you in a loop of debt that will be incredibly difficult to come out of.

After refinancing many times yet continuing to create debt with credit cards, it would be wise to speak with a financial counselor for guidance before something drastic like bankruptcy becomes the only solution.

By Manali