Payment Terms

10 ways to reduce the cost of student loans and other debt

  • Looking at many different lenders and comparing terms can help you find the best rate.
  • Make more than the minimum payment each month and try to make additional payments if possible.
  • If you are looking for a student loan, prioritize federal options before getting a private loan.

If you need to borrow money to pay for something like your car or your education, you want to make sure the debt is as affordable as possible.

Whether you’re looking to lower the cost of your student, personal, auto, or any other type of loan, we’ve got 10 key tips to make sure you’re paying the lowest amount possible.

1. Shop around and compare offers

You can check the rates that many different lenders will offer you by completing simple online applications which should only take a few minutes and won’t affect your


credit score

. You can also use a loan market to compare several offers at once with a single app.

Taking the time to consider a range of options pays off. A SuperMoney.com study analyzed 160,000 loan offers to over 15,000 borrowers and found that the average difference between the highest and lowest APR offer for the same borrower was 7.1 percentage points .

“Just accepting the first loan offer you qualify for can be a costly mistake,” says Andrew Latham, CFP® professional and editor of SuperMoney.com. “The data suggests that comparing multiple lenders can save you more money than raising your credit score by 100 points when it comes to finding the best APR.”

2. Pay early and often

If you have the financial flexibility to make additional or prepayments on your loan, you should. The more additional payments you make for your loan, the faster the balance will decrease and the less interest you will pay overall.

Most lenders don’t charge any penalties for prepaying your loan, and you can shorten your loan term by months or even years with regular extra payments.

3. Make more than the minimum payment each month

Making the minimum payment each month probably won’t do much to reduce your overall debt, since most of your money will go to paying off interest first, especially on high-interest loans. Making higher monthly payments will reduce your debt more aggressively and leave less room for interest to rise.

However, if you have a choice between making the minimum payment or doing nothing at all, pay the minimum. This way you will keep your credit score in good shape.

4. Consider a variable rate loan

Variable rates change periodically throughout the life of your loan and they usually start lower than fixed rate loans. Although you run the risk of your loan rate increasing during its term, you may also benefit from a rate drop.

Paying off your loan quickly enough can negate the fixed rate aspect of a fixed loan, as you will benefit from a lower rate to start with.

5. Refinance your loan

If your credit score, income, or overall financial situation has improved since you first took out your loan, you may want to consider refinancing to take advantage of more favorable terms. This could include a better rate, more accessible customer service, and a different term.

However, be very careful before refinancing federal student loans, as you will lose key protections in the process. For example, you would not be eligible for the COVID-19 student loan payment pause.

6. Pay bonuses, tax refunds or gift money on your debt

While putting extra money into your debt might not sound like the most exciting idea (and you should definitely save some of it to do something good for yourself), an unexpected windfall can boost your ability to pay off your debt quickly.

You’re not always able to predict how much money you’ll receive, but if you have an idea (say your company offers annual vacation bonuses of $1,000) you can budget a certain portion to pay off your debt. . The exact percentage you allocate doesn’t matter, because every little bit counts.

7. Sign up for automatic payments

Many lenders offer discounts to borrowers who sign up for automatic payments. While a 0.25% or 0.50% discount may not seem like much, the reduced rate adds up in the long run.

Plus, signing up for automatic payments ensures that you won’t miss any payments, which will hurt your credit score and could disqualify you from future loans.

8. Choose a shorter duration

When deciding on the terms of your loan, you will usually have the choice between a shorter and a longer term. This varies by loan type, and we’ve listed the general timelines below:

  • Student loans — 5 to 20 years
  • Auto loans — one to seven years
  • Personal loans — 1 to 12 years

If you choose a shorter term, your monthly payments will be higher, but you’ll pay less interest overall, saving you on the total cost of the loan.

9. Prioritize federal options for student loans

Federal student loan options often have lower rates and better protections than private loans, so they are a good option for reducing overall loan costs. Federal student loan relief programs like Public Service Loan Forgiveness can help you get all of your debt forgiven if you work in the public sector and make qualifying monthly payments for 120 months.

To avoid student loans altogether, see what federal assistance you qualify for in the form of grants, scholarships, and work-study, which don’t have to be repaid.

10. Don’t let interest capitalize on your loan

Capitalized interest is unpaid interest added to your loan balance after periods of non-payment, including forbearance, deferment, and after your grace period. This will increase your overall loan balance and you will later pay interest on this higher amount, which will increase the total cost of your loan.

Although loan forbearance can help you get back on your feet if you run into financial difficulties, keep in mind that interest will usually continue to accrue. So the longer you wait to start repaying the loan, the more it will cost you in the end.