How to Reduce Interest Costs on a Personal Loan

While availing of a personal loan could serve as a great tool in meeting financial needs, it can quickly inflate costs due to high interest rates. According to the RBI report, in 2023, the average interest rate on personal loans in India was around 11-15%. With such high rates, the interest costs need to be reduced to save money in the long run. Let’s see how you can do this with a personal loan in Bangalore.

Improve Your Credit Score

Your credit score is one of the most important factors in determining your loan interest rate. Lenders tend to offer lower rates to borrowers with a higher credit score.

A score above 750 can help you secure personal loans at better rates.

If your credit score is low, improve it by paying off outstanding debts, reducing credit card balances, and making timely payments.

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Opt for a Shorter Loan Tenure

Although the lower EMI amount every month due to longer loan tenures, it increases the total interest paid over the entire loan tenure.

Here’s an example comparing a short and long-term loan for ₹3,00,000 at 12% interest:

Loan Amount (₹)Interest Rate (%)Loan Term (Years)Monthly EMI (₹)Total Repayment (₹)
3,00,00012%310,4003,74,400
3,00,00012%56,7004,02,000

By choosing a 3-year term over a 5-year term, you save ₹27,600 in total repayment.

Negotiate with Lenders

Lenders usually are negotiable. When you have a good credit score and stable income, you may:

  • Get an interest rate reduced. This is possible because you are now getting more attractive deals from other lending institutions.
  • Charge waivers. One example would be processing fees and prepayment fees.
  • Longer tenor. Longer tenors decrease the monthly EMI without significantly altering the overall interest.

Repay Early or Prepay the Loan

If your financial situation improves, you can make early repayments or pay a part of the loan. Many lenders do not charge any prepayment penalty and thus save the total interest cost.

For instance, if you prepay ₹50,000 after 6 months, your remaining principal will reduce, and hence overall interest:

Original Loan Amount (₹)Prepaid Amount (₹)Remaining Loan (₹)Reduced Interest (₹)
3,00,00050,0002,50,00015,000

In this case, a ₹50,000 prepayment can save you ₹15,000 in interest.

Seek Balance Transfer to a different creditor

If your current loan bears a high rate of interest, consider transferring the balance to a lender that can offer a lower rate. Balance transfers are an excellent vehicle to save on interest payments, especially when you can qualify for a lower rate with another lender.

For example, if you owe ₹2,00,000 at 15% and send the balance on to someone offering you 12%, your costs will look like this:

Loan Amount (₹)Old Interest Rate (%)New Interest Rate (%)Monthly EMI (₹)Total Repayment (₹)
2,00,00015%12%7,2002,59,200

By transferring the balance to a lower interest rate, you save ₹20,800.

Choose a lender with lower fees

While comparing loans, there are other things that should also be considered such as not only the interest rates but processing fees, prepayment charges, and hidden fees may be charged. A low-interest loan may have its cost higher in the future.

For instance, a lender charges 2% processing fee on a ₹3,00,000 loan amount. So, he would charge ₹6,000. Another lender might charge 3%, which is ₹9,000. These add up over the tenure of the loan. So, if one chooses a lender with fewer or lower fees, it would make a huge difference.

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Choose a Secured Loan

It may be possible to secure a personal loan on a property or other valuable asset you own. Secured loans usually have lower interest rates than unsecured loans, since the lender can rely on the security to recover in case of default.

Periodically Review Your Loan Terms

Once your loan is approved, monitor your payments and check whether any adjustments can be made. For example, if interest rates fall in the market, ask your lender for a rate reduction or consider refinancing.

Conclusion

With a few smart strategies, it is possible to reduce the interest costs on a personal loan. Improving your credit score, opting for a shorter term, negotiating with your lender, or making prepayments all contribute to lowering your overall repayment amount.

Being proactive in comparing different options can drastically minimise the burden of interest payment and save enough money in the long term. So if you are thinking of taking a personal loan, keep these in mind and make sure you get the best deal possible.

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