How to Lower Your Monthly Loan Payment?
If your monthly loan payments are more than you can comfortably afford or are interfering with other financial goals, such as saving for retirement, finding a way to reduce them may be ideal. You have several options, depending on where you are in the process.
If you haven’t yet borrowed money, you can get a lower payment by borrowing less. For example, if you’re purchasing a house or car, increasing your down payment can mean you end up with a smaller mortgage or car loan. Alternatively, you can look for homes or cars with lower prices to get a loan that better aligns with your budget.
If you already have a loan, there are several ways to reduce the monthly payment. One option is to refinance. When you refinance, you take out a new loan and use the principal from the new loan to pay off the current one. Refinancing often means getting a lower interest rate, giving you a lower monthly payment. You can also extend the loan term with a refinance, giving you more time to repay.
Similarly, you can consolidate your loans to get a lower monthly payment. For example, if you have multiple student loans with different interest rates and terms, consolidating them into a single loan can mean you pay less each month. You also get to enjoy streamlined loan repayment as you don’t have to juggle multiple monthly payments.
Another option for student loan borrowers, particularly those with federal loans, is to see if they qualify for an income-based repayment plan. An income-based plan determines your monthly payment based on your earnings. If your payments are too high, an income-based repayment plan can give you a reprieve. However, it can also mean you end up owing more in the long run if your payments aren’t enough to cover the interest due on the loan.
In some cases, transferring a balance can mean you get a lower monthly payment. Some credit cards offer 0% rates on balance transfers, meaning you only must worry about paying the principal due each month. If you take this route, make sure you pay the transferred balance off in full by the time the 0% offer ends.
It’s a good idea to shop around before taking out any loan. Thorough research gives you an idea of what rates are available and helps you find the lender with the best offer. After you’ve borrowed the money and have made some payments on your loan, it’s possible to qualify for a lower rate. An improvement in your credit score or a dip in the market can mean interest rates drop.
You have a few options if you want to try and get a better rate on your loan. One popular method is to refinance, particularly if it’s a mortgage or car loan. Since mortgages often have lengthy terms, such as 15 or 30 years, it’s very likely rates will fall over your loan term.
If that happens, refinancing your mortgage means applying for a new one to get a better rate. When you refinance a mortgage, you will end up paying closing costs, much as you did when you got the first loan. Before starting the refinancing process, compare the cost of getting a new mortgage to what you’ll save over time to see if it’s worth it.
Another simple way to lower your interest rate is to see if your lender offers a discount if you sign up for automated payments. Student loan lenders often offer a slight discount, such as 0.25%, to borrowers who sign up for automatic payments.
Common Types of Loans
A loan can be either secured or unsecured. When you take out a secured loan, you put up collateral, such as a home or car. No collateral is needed to get an unsecured loan. Often, interest rates are lower on secured loans since the lender has a piece of property it can claim if a person stops paying the loan. Within those two categories are multiple loan types:
· Mortgage: A mortgage is a loan you take out to purchase property, such as your primary residence or a vacation home. You can also get a mortgage to buy an investment property, such as a rental home. Mortgage terms are most often 30 years, but shorter terms, such as 10 or 15 years, are available. A mortgage is a secured loan, as the property acts as collateral.
· Home Equity Loan: Once you have a mortgage and have made progress on it, you can qualify for a home equity loan. With a home equity loan, you borrow against your home’s equity or paid-off value. People often use home equity loans to make improvements to their properties.
· Home Equity Line of Credit: A home equity line of credit (HELOC) also lets you borrow against your home’s equity. Instead of borrowing a lump sum and paying it off in equal installments, you borrow when and as needed, like how a credit card works.
· Auto Loan: An auto loan lets you buy a vehicle, such as a car or truck. Auto loans often have shorter terms than a mortgage, such as five years. Like a mortgage, auto loans are secured. The vehicle serves as collateral.
· Student Loan: A student loan pays for post-secondary education. The federal student loan program offers multiple loans depending on a student’s level and financial need. Private loans are also available. Student loans are unsecured.
· Personal Loan: A personal loan is an unsecured loan, meaning there’s no collateral behind it. You can use a personal loan for almost anything. They often have short terms, such as three or five years. Interest rates are usually higher for personal loans than for mortgages or auto loans.