Loan savings
Almost everybody takes a loan these days to fulfill their desires like buying a home or a vehicle, or some gadgets. Some take loans for education or even vacation. It is necessary, however, to investigate if one is indeed getting the best deal in the market. Are there any ways for borrowers to save on loans? Borrowers compare the interest rates on loans, and opt for the source offering lowest interest rate. However, such loan may not necessarily be the cheapest loan. For example, total interest paid out at flat rate of 10 percent per annum on a loan of $100,000 for 5 years may be around $50,000. However, if the interest rate was 8 percent, and tenure was extended to 10 years, total outflow towards interest would be around $80,000. Would that make the 8 percent loan cheaper or costlier? Apart from interest rates the borrower must focus on term of the loan. Borrowers feel that when they borrow for long term, they may be paying more towards interest. However, discounting the future payments at an estimated inflation rate and viewing them at their present values will be a more realistic way to assess the merits of the loan.
Most of the loans require borrower to make some down payments. Borrower thus incurs the interest costs of such down payments as well. After all, the down payment funds could have been gainfully invested to earn interest elsewhere. Some loan products are very cleverly disguised. Lenders offer lower interest rates, but they take a few equated installments comprised of both interest and principal in advance. Effectively, the interest paid out on such loans is much higher. For example let us consider a vehicle being purchased for $10,000. Interest rate stipulated by lender is 10 percent per annum flat. Tenure of the loan is 5 years. Loan is to be repaid in equated monthly installments of $250 over the 60 months. There is, however, a condition that 4 months installments would be paid by the borrower in advance. Thus, the borrower might end up paying almost interest at almost 13 percent instead of 10 percent. Interest rates have been considered at flat rate in our examples because it is easier for comprehension. Similarly, 10 percent is an exorbitant rate, but it has been considered because it is easier to calculate mentally.
Having learnt the importance of interest rates, term and down payment conditions for loan savings, lets consider another aspect - consolidation and refinance. Consolidation of loans can give the borrower an opportunity to lower interest rates on the loans, thereby result in considerable loan savings. Sometimes lenders offer lower rates of interest for such consolidation. At other times, there is an opportunity ? like in home loans, where a borrower may be able to borrow more at cheaper rate to retire costlier credit card debts. Refinance allows borrower to borrow at a lower rate of interest than what he or she actually borrowed at initially. Refinance is more common when interest rates are steadily falling. However, borrower must not overlook transaction costs, any fees and other charges that may be applicable for closing the old loans, and taking new loans. Borrower must also weigh the adjustable rates versus fixed rates of interests. Sometimes, it is better to take adjustable or flexible interest rates than fixed rates.
Some bankers offer loans, which are linked to savings account. What it means is that for calculating monthly interests, the balance in savings account will be deducted from principal. This is a very good feature of the loan. However, there are charges applicable for such benefit, which must be weighed by the borrower. Similarly, loan repayment may be a method for reducing interest costs, but pre-payment charges may make such pre-payments costly.
Other Articles.
