If you're stuck with a loan that's costing you more than you think it should, don't make any rash decisions as you could end up paying more for your borrowing. We show you how to cut the cost of your loan so you clear it asap.
It’s fair to say that most of us end up borrowing money at some point – whether to cover an essential purchase, to secure credit for a mortgage or just for a little extra breathing space.
An unsecured loan can be the perfect solution in these situations, and paying interest and/or fees for the privilege of borrowing is arguably a reasonable compromise.
However, times and interest rates do change. As most unsecured loans are offered on a fixed rate basis you can find yourself paying over the odds for your borrowing if lenders drop their rates.
There are ways to cut the cost of your loan but you'll need to be cautious so you don't end up paying more. Here’s what to do:
1. Find out whether you'll be penalised
Firstly it’s really important to realise that cutting the cost of your loan isn't going to be as straightforward as paying off a credit card. You can clear your credit card at any time without repercussion, but paying off a personal loan early often means that you'll be hit with a whole host of penalties that cost you extra.
For example, most loan providers will impose an early repayment charge if you clear your loan before the end date stated in your contract; this is particularly likely if your loan was taken on a fixed rate/fixed term agreement. Unfortunately it means that you’ll incur a hefty charge when you pay it off; adding to the cost of your borrowing considerably.
There may be other clauses too in the terms and conditions of your loan that mean paying it off ’early’ is either impossible, impractical, or simply unaffordable. As such it’s essential to check your loan terms before you take any action.
2. Work out how much it will cost you to clear the loan
Whether you plan to pay the loan off completely with cash (this is always worth considering if you have the savings available) or refinance it using a cheaper loan from a different lender, you'll need to work out how much it will cost you and decide whether it's worth it before you do anything.
The simple thing to remember is that it's only worth refinancing or clearing your loan if you'll end up paying less overall. Here's what you need to work out before you do anything else:
- Find out what rate of interest you're currently paying.
- Find out how much you will repay in total if you continue with your current deal.
- Find out how much you still owe.
- Find out how much it will cost you (in early repayment charges or penalties) to pay off your loan now.
To work out the total cost of paying off your loan early add your outstanding balance to the amount you will need to pay in penalties if you cleared your loan now. Compare this to the amount you'll repay if you kept to your original agreement.
If you're considering using your savings to pay off your loan completely then only do it if you'll end up paying less by clearing the debt early, if you end up paying more then it's just not worth it.
If you are looking to get a better deal on your loan, this is the figure you’ll need to beat when you shop around for a new lender.
3. Find a suitable lender
You’ll now need to find a lender who will be willing to lend the money necessary for you to move your existing loan, and who suits your circumstances as a borrower. You can use our unsecured loan comparison tables to compare the features, benefits and costs of the different personal loans available and use the Advanced Search button to zero in on the lenders and loans that are right for you.
For example, by using the Advanced Search function you can specify the amount you’d need to borrow, meaning you’ll only be shown lenders who could lend this amount. You can also limit your search by other criteria such as the minimum loan term, interest rate or the minimum income or sort of credit history acceptable to the lender.
If you have a relatively small amount to pay off it may be worth considering using a 0% balance transfer or lifetime balance transfer credit card instead that allows money transfers instead. However, again you will need to work out the total cost and have a plan in place to clear your loan before any introductory offer or interest rate ends.
Bear in mind that when you’ve found some loans that fit the bill you should hold off getting quotes from dozens of lenders to see what sort of interest rate they might offer you – as making more than one application at a time could damage your credit score.
Instead, get cost calculations from the lenders you’re interested in to find out what sort of rate you’ll be charged as well as the total amount you would repay – this means the amount you would borrow plus interest added over the course of the loan term.
4. See if it’s worth the switch
The only way to tell whether moving your loan will make you better off is to compare the total repayment figure from the cheapest cost calculation quote with the total cost of clearing your existing loan early (outstanding balance plus penalties).
If the total cost of a new loan is less than the amount you would pay out if you cleared your current loan today, it’s worth going ahead and moving.
You can simply apply for the new loan and use it to pay your existing loan off, safe in knowledge that you have successfully cut the cost of your original borrowing. Just remember to check your credit report first before you apply so that you can be assured your new lender will be prepared to lend to you.
However if the total cost of your new loan outweighs the amount it will cost to clear your existing loan you should stay as you are.
In this situation the best thing to do may be to simply contact your current lender and see if there is any way they would be willing to reduce your current rate – though this may unlikely, there’s no harm in asking.
