Personal loans have become big business over the last decade or so with the total owed a little over $230 billion. Compared to mortgages, credit cards, and auto loans, personal loans represent about 1.5% of outstanding consumer debt in total. But if you have a personal loan, it’s likely a significant monthly expense. Here are some ways to reduce that expense.
- Understand Your Loan. To reduce expenses, you need to wrap your arms around the loan you’re currently paying. Important items to note: Your interest rate, term (or the length of the loan, sometimes called the repayment period), and current monthly payment.
- Refinance. In general, there are two times when refinancing a loan makes sense, interest rate drop and credit score improvement. Even in a rising (or steady) interest rate environment, if your personal credit score has improved enough to qualify you for a lower interest rate, it may be worth refinancing.
- Consider Prepaying. Making an additional payment toward your personal loan or paying a little more than you owe each month can – in some cases – be an effective way to pay less interest on your loan overall. Some personal loans have prepayment penalties or fees to make up for some of the interest a lender loses if you pay off what you owe in advance. Check with your lender to be sure.
- Discuss Options with Lender. If you are having trouble making payments on your personal loan (or, for that matter, any debt), call your lender, explain the problem, and discuss options. You may be able to extend the term of your loan, skip a payment, or find another solution. If you don’t ask, the answer is always no.