Loans can be used for various purposes and depending on where the borrowed money is leveraged, the loan types are defined accordingly. Let’s take a deep dive into how can you reduce your total loan cost?
There are home loans, education loans, small business loans, loans for credit cards, home equity loans, personal loans, car loans and cash advances. But among them, education loans are statistically the biggest and the most prominent.
What is interest capitalization?
There is a principal amount associated with all student loans. When the interest is not paid as per the time schedule, then the unpaid interest is capitalised by the lender. Interest capitalization happens when the unpaid interest gets summed up to the loan principal amount. The total principal amount increases and interest is then charged on that higher amount, increasing the loan cost.
Accrued interest vs capitalized interest
Accrual interest is the interest amount incurred or accrue debt on a loan and which has not been paid yet. It is booked at the end of an accounting period and recorded as an adjusting journal entry in the books. Interest accrual is reversed at the start of the next accounting period.
Whereas capitalized interest is the amount of accrued interest on the compound interest to be paid. It is essentially a type of compound interest used in record keeping.
Incurred interest is the aggregation of accrual interest and the capitalized interest that needs to be paid in a particular accounting period. The loan fees are excluded from the summation. It is essentially your liability and debt to be paid against a loan.
Accrual interest is the interest amount that gets accumulated against a loan when the loan payments are not done. It is basically the unpaid debt against a loan. At the end of the accounting period, you need to book it in your ledger.
Which student loans to pay off first
To decide on which student loans to pay off first, you need to check out whether you have private loans or federal loans. Private loans are granted by commercial lenders and hence very few repayment options. But they have higher interest rates. If you are eager to pay off the small balances first then target the private loans first. Federal loans have higher interest rates. Paying off them first will save you more money.
Top tips on how can you reduce your total loan cost
- Go for a higher down payment to reduce the amount of loan to be borrowed.
- Opt for a loan where the repayment tenure is long; this distributes the loan repayment amount for a fairly long period of time
- Choose a step-down EMI plan wherein you have to pay more EMI at the beginning and then the amount slowly reduces in the coming months
- Think of availing the loan from the bank where you are a customer and negotiate for lower interest rates
- Check provisions for part repayment of loan helps in reducing the loan burden and the loan cost
How to pay off student loans fast
In order to know how to pay off student loans fast, it is advisable to understand do students loans accrue interest while in school and several other queries. In the subsequent sections, you can find out the best way to pay off student loans.
How does student loan interest work
To know, how does student loan interest work, check out when do student loans start accruing interest and how does interest accrue on student loans. Check out the following terms in the loan document – disbursement date, loan amount, interest rate, first payment date and the payment term.
Paying off student loans early
If you are thinking, whether paying off student loans early is a good decision? The answer is Yes. It is good to pay off loan early to avoid interest. If you can arrange for money earlier than the loan tenure, then paying off student loans in full is a good decision.
Can you negotiate student loan payoff
Yes, you can negotiate on the settlement options and the terms to pay interest on student loans. But it is advisable to be prompt in payments and not default, to allow bargain and negotiation.
Federal student loans interest rate
A very important thing to remember while paying off loans is the ongoing federal student loans interest rate. It is about 3.73%; with this, you can decide how to get a lower interest rate on student loans. It will also help you to judge how to lower student loan payments. Also, understand how capitalizing on federal loans will affect you in the long run.
How to lower student loan payments
Here are some of the ways on how to lower student loan payments and eventually how can you reduce your total loan cost:
Select a repayment plan depending on your cash flow and savings:
- Extended repayment plan
- Graduated repayment plan
- Income sensitive repayment plan
- Income-driven repayment plan
- For the fastest way to pay off student loans, opt for automatic payments which may result in the lender reducing the interest rate
- Ensure to make your loan repayments as per the payment terms, the best answer on how to reduce student loans debt
- If you have multiple federal loans, the recommendation is to consolidate all the loans and go for a direct consolidation loan. This will ensure one monthly payment and one due date.
- Refinance your student loans
Things you must know about paying off student loans
There are some important things you must know about paying off student loans. In the subsequent sections, we will discuss some common questions being asked by students and the answers to them.
What do student loans cover?
You get a student loan for living costs in a hostel or student loans for living expenses off-campus. In additions, the loan covers tuition fees, books and courseware, library fees and other related expenses. Some loans cover even the purchase of vehicles to a certain limited amount.
Do you get student loans for living expenses?
Can you use student loans for rent or use student loans for living expenses off-campus? Well, you can get student loans for living expenses. If you are staying in a hostel or in a rent outside the campus, you can use the loans for the same.
Should I pay off student loans early?
The quickest way to pay off student loans is to pay them early. The accrued interest or unpaid interest to be capitalized leads to increase in the loan amount. To avoid that, it is advisable to pay off the loans as early as possible.
How to check my student loan balance?
Use the NSLDS, the National Student Loan Data System. It is a database which is run by the Department of Education. When someone enrols into a college or an university, the administration department sends loan information to NSLDS.
How to not pay student loans?
If you don’t want to pay off student loans or save your money, the best is to opt for an income driven repayment plan. You can also pursue a career in public service, serve your country or check for loan repayment assistance programs.
What happens if you don’t pay off student loans?
The answer is, if you miss settling student loan debt then there can be negative impacts like reduction in credit score or a bad credit report.
Do deferred student loans affect debt to income ratio?
If you want to get out of student loan debt, then you must not defer student loans more than a year. Your debt to income ratio may get affected if you defer loans for multiple years.
How can I stop student loans from taking my taxes?
If you have a question, “How can I stop student loans from taking my taxes?”
The answer is, make your loan repayments on time for reducing interest rate. Check for student loan refinancing or check if you do qualify for a student loan forgiveness program.
Best way to reduce your total home loan cost
Here are some of the best ways or tips to reduce your total home loan cost:
- Check for short tenures for home loans so that the overall interest payable is less
- Check – “What is a good total interest percentage?” after comparing the interest rates online of the various lenders or banks
- Try to make prepayments before the loan payment schedules which reduces the total principal amount
- Go for more down payments, so that you need not have to avail for more student loans.
- You can also increase your EMIs in between if you have a job with good salary
- Check for better deals from lenders if you have a good credit history and credit score
How to avoid paying interest on car loan?
- Pay your monthly amount every 2 weeks or pay a heavy amount every year
- To reduce interest on unsubsidized loans, never skip the payments
- Refinance your car loans
- Round up your loan payment amount to reduce the tenure as well as the interest rate
Kuntala is a versatile writer with a focus on diverse areas around work, productivity, collaboration at work, hiring, management, HR, and training. Her background of past experience in technology and consulting helps in molding razor-sharp insights into the research and user-focused content she creates. Professionally she is an IT consultant in a sales role and also a writer of short stories and poems, travel blogger, and fashion influencer.