Its everyone dream to purchase a luxurious home, buy a nice car, take an exotic vacation or study abroad. However, all these activities require a substantial financial investment, if you plan to take a loan to fund these expenses; you need to make smart financial decisions.
Loans can seem like a significant burden to most people, as they come with high-interest rates and monthly EMIs; however, there are several ways to reduce the interest rates on official credit. Depending on your loan type, you can save money on interest on your loans by paying lower EMIs.
So, if you are thinking of taking a loan for a home renovation, buying a car, taking a vacation, or even purchasing big-ticket electronics, here are some simple ways in which you can save money by reducing the interest amount:
Tips To Reduce Interest On Your Loans
- Make more frequent payments
- Enable automatic debit of EMIs
- Consolidate your loans
- Pay off your loans before their tenure
- Compare rates online
- Update contact information
- Claim loan interest deductions
- Understand loan amortisation and how interest accrues
- Accelerate part payments
- Choose the right repayment plan
- Avoid late payments at all costs
- Improve your credit score
- Open a new bank account
- Make more frequent payments
Instead of making equated monthly installments (EMIs), a bi-weekly schedule will allow you to make extra payments in a year. As there are 52 weeks in a year, you will make 26 bi-weekly installments; however, if you stick to a monthly payment plan, you will be making 12 payments (equivalent to 24 bi-weekly installments).
So, you will end up paying one or two extra installments each year in a bi-weekly schedule which over the years can add up to prepayment of your loan. You will pay off your loan a few months earlier, as well as save money on interest.
- Enable automatic debit of EMIs
By setting up an auto-debit facility in your bank account, you will never forget a loan payment and virtually eliminate the chances of defaulting. This will also help you in avoiding any fines or late payment charges. You can also round of the amount to the nearest zero, for e. g. Instead of paying Rs 9460 each month, pay Rs 10, 000. The few extra hundreds each month will add up and make a big difference at the end of your loan term.
You will save money and be able to pay off your loan a little early. You can set up an automatic monthly debit of EMIs from your account by filling the NACH (National Automated Clearing House) form alongside the loan application form.
- Consolidate your loans
Many people consider switching loans or banks to be an unnecessary hassle. However, if you are getting a loan at a lesser rate of interest from a different lender, then it is worth doing a quick calculation and finding out how much you will end up saving by switching your loan account.
If you have multiple loans consolidating them into a single loan could help you save money via a lower interest rate and will also help in simplifying your monthly payments. Several lenders also allow existing loans to be merged into new loan accounts, so make sure you enquire about the same.
- Pay off your loans before their tenure
Loans are generally taken for a few years at a stretch. If you have a specified term for your loan, prepaying it could result in a penalty; however, some lenders will let you repay your loan without any charges. In case your lender doesn’t charge any penalty amount for prepayment, you must consider it.
However, in most cases, the prepayment or foreclosure charges are usually a fraction of the loan interest. You should definitely consider this option if you have a high outstanding amount or a long tenure remaining. By paying off your loan early, you can save a lot of money in interest rate charges depending on your loan amount and how early you pay it off.
- Compare rates online
Nowadays, it is extremely easy to check loan rates offered by different lenders online. Existing loan holders should also check the offers available to them and monitor the interest rates being offered by lenders. If the difference in interest rates is high, then it makes sense to switch your loan.
There are various online portals which give a summarised view of the interest rates, fee, and other charges by different lenders. Do your research and ensure you get the best rate of interest on your loan. PaySense offers some of the lowest interest rates for unsecured personal loans in the industry.
- Update contact information
Borrowers must make sure that their contact information and address is updated timely to receive loan statements or bills on time. Old contact information can cause delays in receiving bills, statements, etc. which may lead to late loan repayment.
So, make sure your lender has your updated contact information. This will help in the prevention of any unnecessary fines or penalties, or worse, initiating the recovery process against your loan account.
- Claim loan interest deductions
Home loans and student loans are eligible for certain tax deductions on the interest amount. This tax rebate can result in savings of thousands of rupees to customers.
Make sure that while filing your income tax returns, you include deductions on your home loan or student loan. If you’re unsure, consult a chartered accountant to check how much amount can be claimed in your case.
- Understand loan amortisation and how interest accrues
The borrower is charged interest each month on the outstanding principle balance of the loan. Initially, each loan payment will be applied towards interest charges and not the principal amount, so your loan balance will decrease slowly.
In case of deferment or forbearance, there may be a higher interest amount charged, which also has to be paid off before the principal amount will decrease. By paying off a higher amount each month, you can end up paying your principal amount quicker. Thus, make sure you understand the repayment plan and its type, so that you can choose your EMI amount.
- Accelerate part payments
If you have extra money, you can pay off a part of your outstanding loan amount, which can lead to saving on the interest amount. What’s more, some loans like home loans and student loans are also eligible for tax deductions; so before prepaying any loan, make sure you enquire about the benefits and rebates offered.
It makes sense to pay off personal loans faster than home loans or student loans, which have a higher interest rate and don’t provide any tax rebates.
- Choose the right repayment plan
It is vital to select the right repayment plan while applying for a loan. A longer loan tenure results in smaller monthly payments; however, it also leads to a higher interest amount being paid. If you can pay a higher monthly EMI, you can make your repayment term shorter and save interest.
At PaySense, you have the freedom and flexibility to choose an EMI repayment plan that suits you the most.
- Avoid late payments at all costs
It is essential to track your loans and make payments at the right time. Borrowers sometimes are late with payments or even default on a loan as they forget about the payment due date. This results in the lender levying a late fee or penalty on the borrower and also adversely impacts the credit score.
Thus, even if the lender doesn’t send you a notice regarding the due date, the borrower must keep track of the payments as any default or delay can lead to an increase in the loan amount.
PaySense customers can use the PaySense mobile app to keep track of their application status, payments, EMI due date, outstanding amount, and the number of EMIs left.
- Improve your credit score
One of the best ways to get lower interest rates is to have a high credit score. The first step to improving your credit score is to clear up any past pending payments like credit cards, etc. You should also lower the amount of debt you currently have to get a better credit score.
If you know that you will need to take a loan in the future, it is crucial to work on improving your credit score beforehand. Customers with higher credit scores are not only eligible for higher loan amounts but also usually get lower interest rates; this because they are deemed safe and creditworthy by lenders.
- Open a new bank account
Some banks offer lower mortgage rate or interest rates on car loans, etc. if you open a savings or checking account with them. Switching or opening an account in a new bank can help you save money, especially if you are thinking of applying for a significant loan amount. Though it may seem challenging to switch accounts, it can simplify your loan payment process considerably and also help you save money!
The points mentioned above can help reduce the costs related to loans incurred by borrowers. There are several types of loans, repayment plans, and options that must be considered before you apply for an instant loan.
With the increased competition in the market, you can get the best interest rates and features on your loan, even if you have an average credit score. It is important to check various online and compare the offers of different lenders before taking the final call.
Even if you save 0.25% on your loan interest rate, you can add up to thousands in savings. Remember, if loans are managed well, they will not negatively impact your portfolio or credit report, and also help you save money in the process!
