How Can You Reduce Your Total Loan Cost? (Verified Tactics)

Written by Shalini Kapoor
Last updated:
Reviewed by Daisy Martinez
Our site offers educational and informational content only, not professional financial advice. Consulting a financial advisor about your particular circumstances is best.

Are you wondering how you can reduce your total loan cost? Managing debt can be a challenge, but with the right strategies and tactics, it’s possible to reduce the overall cost of your loans.

To provide clear answers, we embarked on a journey of thorough research, consulting financial experts, and scrutinizing lending practices. In this article, we present 12 verified tactics that can help you significantly cut down the overall cost of your loans. It’s time to take control of your financial future.

What’s To Come:

Factors That Determine Your Loan Costs

When determining how to reduce your total loan cost, it’s essential to first understand the factors that contribute to your loan costs. Below are some key elements that can impact your loan costs:

Interest Rates and APR: The interest rate is the percentage of the loan amount you are required to pay back in addition to the principal. The Annual Percentage Rate (APR) is an essential figure that encompasses both the interest rate and any fees associated with the loan. Interest rates and APR directly affect a loan cost as they determine the amount of interest charged on the principal amount borrowed.

Credit Score: Your credit score reflects how trustworthy you are with credit and has a big impact on the interest rates you can get. Higher credit scores generally result in lower interest rates. To achieve a high credit score, it’s important to have a long credit history, make on-time payments, keep credit utilization low, have diverse credit accounts, and limit new credit inquiries.

Loan Term: The duration of your loan can also impact your total loan cost. Generally, shorter-term loans have less interest to pay in total but ask for bigger monthly payments than longer-term loans.

Loan Amount: The size of your loan plays a significant role in your total loan cost. Bigger loans tend to have higher total interest payments. 

Income and Debt: Lenders often look at your debt-to-income (DTI) ratio to decide whether to approve your loan and what interest rates to offer. By keeping your debt manageable in relation to your income, you may find it easier to qualify for better loan terms and lower interest rates.

12 Ways To Reduce Your Total Loan Cost

Now that we’ve discussed the factors that determine your loan costs, it’s time to explore practical tactics to reduce them. We’ve compiled 12 effective strategies to help you save money and pay off your loans faster. Let’s dive in and start implementing these tips today!

Increase Your Credit Score Before Applying for a Loan

Improving your credit score should be a priority before applying for a loan. According to a report by Experian, borrowers with excellent credit scores (above 800) received an average interest rate of 3.68% on new car loans in the first quarter of 2021, while those with poor credit scores (below 600) received an average rate of 15.24%. 

Additionally, a study by LendingTree found that improving your credit score by just 20 points could save you an average of $12,000 in interest over the life of a 30-year mortgage. 

A higher credit score can grant you access to more loan options and better interest rates, thereby reducing your total loan cost. Here are a few key steps you can take to achieve this:

Pay your bills on time: Timely payment of your bills, including utility, rent, and credit card payments, is crucial for maintaining a good credit score. Late or missed payments can negatively impact your credit score.

Keep your credit utilization low: Credit utilization refers to the percentage of your available credit that you’re currently using. Aim to keep this number below 30% to demonstrate responsible credit management and positively affect your credit score.

Don’t close old credit accounts: The length of your credit history makes up a portion of your credit score. Maintain older credit accounts with a positive payment history, even if you’re not using them, as they can help improve your overall credit history.

Limit credit applications: Submitting too many credit applications may result in hard inquiries on your credit report, which can hurt your credit score. Only apply for new credit when necessary and pre-qualify for loans to minimize the impact of hard credit inquiries.

Monitor your credit report: Regularly reviewing your credit report can help identify any discrepancies or mistakes that might be hurting your credit score. By law, you are entitled to a free annual credit report from each major credit bureau (Equifax, Experian, and TransUnion). Take advantage of this right and address any issues promptly.

Taking these steps can help you improve your credit score effectively and make it easier for you to secure a loan with favorable terms. Although it might require effort and diligence, the benefits of a higher credit score will be worth it in the long run.

Compare Lender Offers And Do Research Beforehand

To reduce your total loan cost, compare lender offers and consider multiple lenders, including banks, credit unions, and online providers. Credit unions often offer lower interest rates and personalized customer service, so explore their loan options if you’re a member.

While researching various lenders, pay close attention to the following:

  • Interest rates: Lower rates result in lower overall loan costs.
  • Repayment terms: Shorter repayment terms can save you money on interest, although your monthly payments will be higher.
  • Fees: Origination, application, and prepayment fees can add up, so look for lenders with minimal or no fees.
  • Customer reviews: Check out feedback and reviews from previous borrowers to gauge the lender’s professionalism and trustworthiness.
  • Potential Discounts: Potential discounts, such as loyalty programs, can provide lower interest rates or waived fees. Asking about these discounts can help you save money in the long run.

By taking the time to compare offers from various lenders, you can gain a better understanding of your options and potentially secure a lower-cost loan. Remember, understanding your options and being thorough in your research is key to finding the best loan terms and minimizing the overall cost of borrowing.

Choose A Shorter Term

When you’re looking for ways to reduce your total loan cost, one of the most effective strategies is to choose a shorter term

Consider your personal financial situation and your ability to handle higher monthly payments before going for a shorter loan term. While your monthly payments may be higher, you’ll still save money in the long run. For example, if you take a 5-year loan instead of a 7-year loan, you might have slightly larger monthly payments, but you’ll pay significantly less interest over the course of the loan.

You should carefully analyze your budget and ensure you can comfortably manage the higher payments associated with a shorter loan term. In some cases, you may need to adjust your spending habits or prioritize debt repayment over other expenses. This can help you in paying off your loan efficiently, ultimately reducing your total loan cost.

Another point to keep in mind is that some lenders might offer lower interest rates for shorter loan terms. If you can manage the higher monthly payments, you’ll not only save on interest but also get a better interest rate. Be sure to compare lender offers when applying for a loan to make the most of the benefits provided by shorter terms.

Consider a Variable-rate Loan

When looking to reduce your total loan cost, you should understand the difference between fixed-rate loans and variable-rate loans, and consider opting for a variable-rate loan. Why? 

We have made a quick comparison table to explain the difference between the variable-rate loan and the fixed-rate loan: 

AspectVariable-Rate LoanFixed-Rate Loan
Interest RateFluctuates periodically based on market rates and economic conditions.Remains constant throughout the loan term.
Rate StabilitySubject to potential rate increases, leading to varying monthly payments.Offers stable, predictable monthly payments over the loan term.
Initial Interest RateTypically lower than fixed rates, making initial payments lower.Generally higher than the initial rate of variable loans.
Rate ChangesPeriodic adjustments may result in higher or lower interest costs.No rate changes during the loan term, ensuring payment consistency.
Risk ToleranceSuited for borrowers comfortable with rate fluctuations and potential savings.Ideal for those seeking budget certainty and protection from rate increases.
Long-Term PlanningMay be riskier for long-term loans, as rates could rise significantly.Provides peace of mind for long-term financial planning.
RefinancingMay require refinancing to secure a fixed rate if rates rise too much.Not necessary, as the rate remains constant throughout the loan.
Market DependencyExposes borrowers to market volatility and economic conditions.Isolated from market changes, offering stability during economic shifts.
Popular Loan TypesCommon in adjustable-rate mortgages and short-term personal loans.Predominant choice for mortgages, auto loans, and long-term financing.
SuitabilityBest for financially savvy borrowers who can adapt to changing rates.Best for risk-averse individuals seeking payment predictability.
Rate Lock OptionTypically lacks rate lock options, making future payments uncertain.Offers rate lock options, securing the interest rate for a set period.

Variable-rate loans have interest rates that can change, typically based on market rates. This can be good when rates are low, leading to lower monthly payments and potential savings.

These loans start with an initial rate, often lower than fixed-rate loans. For example, you might begin at 4% for 30 years with a five-year rate lock. After that, rates can change with the market.

Understand the upsides and downsides of variable-rate loans. Lower payments are possible in good markets, but rates can also rise. Evaluate your finances, budget, and comfort with uncertainty.

Improve your credit score to lower your rate or explore refinancing options, saving you money. Variable-rate loans can cut your overall costs. So, keep an eye on market trends and maintain good credit, but also assess your financial situation and risk tolerance before choosing one.

Use Auto Pay For a Reduction in the Interest Rate

By signing up for automatic loan payments, you can cut down on interest charges and enjoy some great advantages. Here’s why you should consider using auto-pay:

  • Convenient Payment Process: Auto-pay lets your loan provider automatically deduct your monthly payment from your bank account, ensuring that you never miss a due date.
  • Boost Your Credit Score: Using auto-pay can also give your credit score a boost. Making regular, on-time payments adds positively to your credit payment history, which plays a crucial role in determining your credit score.
  • Stay on Top of Payments: Enrolling in auto-pay helps you stay on course with your loan payments. With automatic withdrawals, there’s no chance of forgetting or missing a payment. Consistently making on-time payments ensures you avoid late fees and potential harm to your credit score.

To start using auto-pay, follow these steps:

  1. Contact your loan servicer and inquire about their auto-pay program.
  2. Provide the necessary bank account information and authorization for automatic withdrawals.
  3. Review the terms and conditions of the auto-pay program, including the interest rate reduction and any potential fees.

Make More Than The Minimum Payment

Making more than the minimum payment on your loans can significantly reduce your total loan cost. When you make extra payments, you’re reducing the principal balance of your loan, which in turn results in less interest to be paid on the remaining balance. This approach can help you save money and pay off your loan faster.

Before you start making any extra payments on your loan, take a moment to review your loan terms to ensure there are no prepayment penalties. Some lenders might charge you a fee if you aim to pay off your debt ahead of schedule. If your loan allows for additional payments without penalties, here’s a straightforward guide on how to do it effectively:

  • Monthly Boost: Begin by setting aside some extra funds for your loan payment each month. Even small amounts can add up over time. For instance, if your regular monthly payment is $300, think about adding an extra $50 or $100 to each payment. This not only chips away at your principal balance but also slashes the long-term interest costs.
  • Go Biweekly: Instead of making monthly payments, consider making biweekly payments, which adds up to an extra payment per year. Splitting your payment in half and paying it every two weeks can be a simple way to sneak in an extra payment without straining your budget.
  • Communicate with Your Lender: When making those extra payments, it’s crucial to communicate with your lender about how they should be applied. Make sure they apply the extra amount to your principal balance, not future payments or interest charges. This guarantees that you’re effectively lowering your overall loan cost.
  • Capitalize on Windfalls: Don’t forget to consider making a larger one-time payment when you come across extra cash, such as a tax refund or a bonus. This approach can significantly reduce your loan balance, leading to less interest accumulation and a substantially shorter loan term.

Refinance Your Loan

Refinancing your loan can be an effective way to reduce your total loan cost. When you refinance, you replace your existing loan with a new one, often with better terms and a lower interest rate. This can help decrease your monthly payments, save money on interest over the life of the loan, and potentially pay off your loan sooner.

Here are some tips for successfully refinancing your loan:

  • Assess Your Finances: Begin by evaluating your current financial situation. See if you can secure a lower interest rate, shorten the loan term, or get better loan conditions.
  • Shop Around: Remember, there are costs involved in refinancing, like closing fees. Compare the potential savings from a lower interest rate with the costs to ensure it makes financial sense.
  • Boost Your Credit: Improving your credit score can boost your chances of approval and getting a lower interest rate. Pay bills on time, keep credit card balances low, and avoid unnecessary debt to maintain a good credit score.
  • Stay Informed: Keep an eye on interest rates and market trends as they affect the best time to refinance. If current rates are lower than when you first got your loan, it might be a good time to explore refinancing.

Use Part Of Your Bonuses, Tax Refunds, Or Gift Money

To effectively trim down your total loan expense, consider using windfalls like bonuses, tax refunds, or gifted money to make extra payments towards your loan principal. This approach can substantially lower your outstanding balance and cut the interest you pay over the loan’s lifespan.

Bonus Bucks: 

When you receive a work bonus, it might be tempting to splurge on fun purchases. However, directing some of that bonus toward your loan can yield significant long-term benefits. Remember, bonuses are often taxed at a flat rate of 22%, so factor in taxes when deciding how much to put towards your loan.

Tax Refund Tactic: 

Your annual tax refund can also be a potent tool for accelerating loan repayment. Since tax refunds usually come as a lump sum, they can make a sizable dent in reducing your principal balance. Before you know it, this lower balance will translate into reduced interest costs and a quicker loan payoff.

Gifted Gains: 

If you receive gift money from friends or family, contemplate allocating a portion of it to make extra loan payments. While it can be enjoyable to indulge in treats or luxury items, remember that the long-term advantages of cutting your loan cost will serve you better over time.

Consistently funneling these extra funds toward your loan can create a noticeable impact on the total cost you’ll bear over the loan’s life. Just be sure to check with your lender regarding any prepayment penalties or restrictions before making these extra payments. By following this strategy, you can confidently and steadily conquer your loan while reducing its overall cost.

Seek Out Loan Forgiveness

If you have student loan debt, it’s a good idea to explore the possibility of loan forgiveness. There are a few options for student loan forgiveness, but eligibility requirements can vary. Remember that loan forgiveness means you don’t have to pay back some or all of your loan.

Some careers, such as public service and teaching, might qualify you for loan forgiveness after a certain number of years of service. Public Service Loan Forgiveness (PSLF) program is designed for individuals who work in qualifying public service jobs, such as teaching or being a first responder. If you meet the requirements and make 120 consecutive payments, you may have your remaining federal student loan debt wiped out.

To take advantage of PSLF, here are the key steps you should follow:

  1. Ensure your loans qualify for the program.
  2. Work in a qualifying public service job.
  3. Enroll in the right repayment plan, generally an income-driven plan.
  4. Make 120 qualifying monthly payments.
  5. Submit the PSLF application and receive a decision.

Remember, not all plans for student loan forgiveness have been successful. For example, President Biden’s proposal to forgive up to $10,000 or $20,000 of student loan debt did not come to fruition. So it’s important to stay informed and be cautious of too-good-to-be-true forgiveness promises.

To explore your eligibility for loan forgiveness or other repayment assistance programs, research the available options, understand the requirements, and be ready to meet them. This can be a valuable step in reducing your overall student loan debt and keeping your financial future on track.

Prioritize Federal Options for Student Loans

If you’re carrying student loan debt, consider focusing on federal solutions to lower your overall loan expenses.

Federal loans usually offer lower interest rates, more flexible repayment plans, and income-driven repayment options. These features can help you save money and avoid default during the repayment process.

Start by filling out the Free Application for Federal Student Aid (FAFSA) to determine your eligibility for federal loans, grants, and work-study programs. The FAFSA is used by colleges and universities to determine your financial aid package, which may include federal loans.

Federal loans come in two types: subsidized and unsubsidized. Subsidized loans are based on financial need, and the government pays the interest while you’re in school. Unsubsidized loans are not based on need, and interest starts accruing as soon as the loan is disbursed. Both types have a grace period after graduation during which payments are not required.

To minimize the overall cost of your loans, borrow only what you need. Choose the least expensive option that meets your educational and living expenses. Remember that federal loans are available to you each year, so adjust your borrowing strategy as your financial needs change.

Don’t Allow Interest To Capitalize

Let’s break down interest capitalization in simple terms. It’s when any unpaid interest gets added to your loan’s main balance, making your total owed amount bigger. When this happens, your loan balance grows, and you end up paying interest on this new, higher balance.

Here are some practical ways to dodge interest capitalization and keep your loan costs down:

  1. Timely Interest Payments: Make sure you pay the interest on time. This way, you stop it from piling up and getting tacked onto your main balance. If you’re still in school or within a grace period, think about making interest-only payments to prevent your balance from creeping up.
  2. Stick to a Payment Plan: Create a consistent repayment plan and make payments regularly, especially if you can afford to pay more than the minimum. This approach helps you pay off your loan faster and reduces the interest that could potentially capitalize. Extra cash like tax refunds or bonuses can also be used to shrink your loan balance.
  3. Automatic Payments Advantage: Enroll in automatic payments if possible. Many lenders offer interest rate discounts for automatic payments. This ensures you never miss a due date, which is key to avoiding interest capitalization.
  4. Refinancing Potential: If your credit score has improved or you have a stable long-term income, consider refinancing your loan. It can help you secure a lower interest rate and better loan terms, reducing the risk of interest capitalization.

By following these steps, you can manage interest capitalization effectively while keeping your loan manageable.

Choose Income-Driven Repayment Plans

Managing your income effectively can significantly impact your loan cost. By exploring income-driven repayment options and diligently adjusting your spending habits, you may reduce your total loan cost and ease your financial burden.

What Is an Income-driven Repayment Plan?

An income-driven repayment plan is designed to align your monthly loan payments with your income. These plans calculate your payments based on your discretionary income and family size, ensuring that you pay an affordable amount each month. Over time, pursuing an income-driven repayment option can lower your overall loan cost, primarily if your income increases gradually.

Another option for reducing your loan cost is adopting an income-based repayment plan. Similar to income-driven repayment, this plan adjusts your payments according to your income and family size. However, an income-based repayment plan may feature a different payment calculation formula, resulting in lower monthly payments and potentially reducing your total loan cost.

Strategies To make the most of these repayment options:

  1. Evaluate your income regularly: Keep track of any changes in your income, and make sure your loan servicer is informed. Adjustments to your income can result in different repayment amounts, which may benefit you in the long run.
  2. Comparison shop for loan opportunities: Before committing to a loan, research multiple lenders to discover the best rates, repayment plan options, and terms that suit your financial needs.
  3. Prioritize paying off high-interest loans: Concentrate on repaying loans with higher interest rates first to reduce the overall amount of interest paid over time.

By taking these steps, you can influence your loan cost using your income and available repayment options. Remember, staying informed, proactive, and strategic can help alleviate the burden of loans and set you on the path to financial stability.


Managing your loan wisely can save you a significant chunk of change. With the tactics shared in this article, you’re now equipped to make informed choices. Remember, every little bit counts! By being proactive and smart about your loan repayments, you can ease future burdens. So, dive into these strategies, lighten your financial load, and pave the way for a more relaxed, debt-free future. Cheers to savvy spending and saving!


What increases your total loan balance?

Your total loan balance can increase due to factors like accumulating interest, fees, and penalties. Late or missed payments can also cause your balance to grow as these often trigger additional fees. To keep your loan balance low, maintain timely payments and review your loan terms to understand any potential charges.

Are there any free personal simple loan calculators?

Here are free personal simple loan calculators:

How can loan consolidation assist in lowering total loan expenses?

Loan consolidation combines multiple loans into a single loan with a single payment, which could have a lower average interest rate or a more extended repayment term. This could lower your monthly payments and reduce the overall loan cost.

Are there any loan repayment programs that can help decrease total loan costs?

Yes, some loan repayment programs can help decrease your total loan cost. These programs include student loan forgiveness for public service or specific professions, income-driven repayment plans, and employer-sponsored repayment assistance programs.

How can choosing the right loan repayment plan lead to lower overall costs?

The right loan repayment plan allows you to manage your debt effectively by taking into account your financial situation and goals. Opting for a plan with lower interest rates, higher monthly payments, or shorter terms can help you save on interest and reduce the overall loan cost.

How do I maximize my FAFSA refund?

To maximize your FAFSA refund, fill out the FAFSA form early, report accurate financial information, and explore additional grants or scholarships. This can increase the potential financial aid you receive, reducing the need for loans and minimizing their costs.

Who do you contact if you have questions about repayment plans?

If you have questions about repayment plans, contact your loan servicer or lender. They can provide information about available options, and eligibility requirements, and assist you with any changes to your current plan.

How to pay off student loans when you are broke?

If you’re struggling to pay off student loans, consider options like income-driven repayment plans, deferment or forbearance, and loan forgiveness programs. Prioritize high-interest loans, make extra payments when possible, and reduce expenses to free up more funds for repayment.

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Shalini Kapoor

Shalini Kapoor is a dedicated financial writer and editor at Currently pursuing her Master's in Accounting, she possesses a unique blend of academic rigor and practical insight into personal finance. Shalini is fervent about empowering individuals with actionable financial advice, grounded in her in-depth studies and natural flair for simplifying complex topics. As an editor, she ensures every piece of content meets the highest standards of accuracy and relevance. With a passion for continuous learning, Shalini is not just sharing knowledge but also constantly expanding her own, to benefit the readers of

Disclaimer: The opinions, analyses, and information expressed by this author are for informational purposes only and do not constitute financial, investment, or other professional advice. Always conduct thorough research and consult with a professional before making any investment decisions.

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