We often take the rates we pay on our student loans, credit card balance, vehicle loans, and mortgages at face value—the rate you got when you took out the loan is what you pay from then on, right?
Not always. If interest rates have gone down or your credit has improved since you took out the loan, it’s possible you can refinance or take advantage of other promotions to decrease what you’re spending on interest.
And who doesn’t want to pay less? Here’s what to consider as you search for a better deal.
The best options for you will depend on whether your loans were through a federal program or a private lender. Start by contacting your current lender to see if they have any options to save you money, such as consolidation (if you have multiple loans), and look into other options with your bank, such as taking out a line of equity on your home and using it to pay your student loans (since your interest rate on a line of equity is typically pretty low). Check out this handy checklist of student loan repayment options from our partner LearnVest.
Credit Card Balance
Especially around the holidays, it’s easy to charge expenses—and leave them on your card. Card providers know this, too, which is why you’ll often find great balance transfer rates around the new year. To get you to make the switch to their card, companies will entice you with a low introductory rate (think 0-2% APR for 6-12 months) on balances transferred from your current card, before the rate jumps to their standard amount (which you can be sure it eventually will).
If you can pay off the balance in that time period (and your credit score qualifies you for the promo), it’s definitely worth the change. Just look out for balance transfer fees—some cards charge them, some don’t—and make sure the standard rate, terms, and conditions won’t set you back further a few months down the line.
Or if you’re happy with your current card, you can also contact the card holder, mention you’ve been offered a better rate elsewhere, and ask if they’ll lower yours (or add other perks). Often, it works!
Refinancing your auto loan can be a bit tricky. Since interest rates are priced based on risk, the older your ride, the more you’ll pay—which means that refinancing may not save you money. And since most people are upside-down on their auto loan at some point (meaning they owe more than the vehicle is worth), a bank may be unwilling to do a refi if the collateral (the car) isn’t worth the loan amount.
That said, call around to banks, shop rates based on your vehicle’s age, and see if you can find a better deal. Or simply ask your current bank if they can beat the rate you’ve currently got. Be careful, though, that you’re not just lowering your monthly payment. If you extend the term of the loan (e.g., you pay less per month but for a longer period of time), you might end up paying more in the end.
Interest rates for mortgages and home equity loans have dropped significantly recently, with an average rate on a 30-year fixed at 3.34%—the lowest it’s been since 1971. And your mortgage is probably your biggest expense, so any savings here will add up considerably.
You do want to be sure, however, that closing costs, appraisal fees, and other charges for refinancing (which vary by your specific needs—this calculator breaks down what you can expect to pay depending on what’s required for your loan) don’t cancel out what you save by dropping your interest rate. Here’s a handy calculator to help you decide, but a general rule of thumb is that the closing costs will be worth the savings if you can reduce your interest rate by at least one full percent.
As with an auto loan, be careful that if you extend the term of the loan, you’ll still be saving money in the end (not just lowering your monthly payment—though that in itself could help free up cash flow to pay off any higher interest loans faster).
Another thing to consider: If you have other high-interest loans, you can take out a lower-interest home equity line of credit to pay them off. I know a couple who did this to tackle their student loan debt and more than halved what they would have had to pay in interest!
Any Bank Loan
Some banks and lenders will reduce your interest rate if you set up an automatic payment for your loan. They may have certain stipulations—e.g., the payment must come out of an account with them, that account has to be set up for direct deposit of your paycheck—but if you can meet those requirements, it’s an easy way to save a little extra. Ask your bank if they have any special offers (and shop around if they don’t!).
Muses, have you ever refinanced a loan? Or found a creative way to pay off your debt or lower your payments? Tell us about it in the comments!