Last updated: 23/07/2020 | Estimated Reading Time: 4 minutes
How to reduce the cost of your personal loans
There are different ways in which you can reduce the cost of your personal loans. Each option will have benefits and consequences and one may be more suited to you and your lifestyle. We look at some different options here, so that you can reduce the cost of your personal loans in a way best suited to you.
In This Guide:
- Switch to a low-interest loan or a shorter deal
- Should you use debt consolidation?
- Should you pay off debts with credit cards?
- Pay off your loan early with extra payments
- Claim back payment protection insurance (PPI)
Switch to a low-interest loan or a shorter deal
If you can’t pay off your loan with savings, then it may help you to pay it off with another loan. This can often work out cheaper and will allow you to pay off the loan in full.
If you can find a loan where you can get a lower interest rate, a shorter term or both, this may be a good option for you.
The benefit of going shorter term is that you’ll save much more in interest and be able to pay off your loan early. However, it does mean that the payments each month will be increased, so only use this option if you are able to pay the higher amount.
By switching to a low-interest loan you can save a lot of money. For example, if you owe £5,000 with 3 years to pay it and have an interest rate of 15%, the cost of paying off the loan is over £1,000. However, if that interest goes down just 5%, the cost of paying off the loan is reduced to £800, which shows just how much you can save.
Should you use debt consolidation?
A loan can be advertised as a debt consolidation loan which means that you can merge all your loans into one. This is another way in which you can reduce the overall cost of your personal loans.
Debt consolidation loans are attractive because they have lower interest rates and lower payments. However, the downside to this type of loan is that it’s usually secured against your home. This means that should you become unable to keep up with payments, you risk losing your home.
Therefore, consolidation loans should only be considered if you have a repayment plan and can stick to it. It is too easy to consolidate debts and then build up more debt elsewhere, so you need to have a plan and make sure you budget for it.
Should you pay off debts with credit cards?
Paying off debt with your credit card is a good option if you have a good credit score and you know you are disciplined in your repayment.
You can sometimes find interest-free or low-interest balance transfer credit card deals which directly transfer money into your account.
You can then use this to repay your personal loans.
You have to be cautious with this option, however, because these deals can sometimes be called ‘super balance transfers’, which means they come out with a fee. This may then not make it worth it, so you have to work out whether it is cost effective for you or not.
You also need to make sure you can repay the debt before you reach zero otherwise the low-interest rate runs out.
Pay off your loan early with extra payments
Another way to reduce the cost of your personal loans is to repay more each month. These extra payments will mean that you can pay off the loan sooner and so in turn reduce the overall cost.
If your loan is unsecured, you can make extra payments of up to £8,000 without having to pay extra, as long as it’s within a 12-month period.
However, you must contact your lender beforehand - you can’t just start overpaying. You must then make the first overpayment within 28 days of the notice.
It is advisable to check the terms and conditions before you make your decision so you can see what exclusions apply for overpayment on your loan.
Claim back payment protection insurance (PPI)
Many people are completely unaware that they are eligible to claim back PPI, but lenders often sell payment protection insurance alongside loans and credit cards.
Even if you were not aware of it at the time, there is a chance it was sold to you. If it was mis-sold you can claim your money back.
PPI has cost some people hundreds of pounds which they have managed to claim back, so it is worth checking if you are eligible or not.