Have you sat down recently to look at all of the ways you are paying interest? Interest is basically a fee that you pay for the ability to borrow money. Credit cards, mortgages, student loans, car loans, and sometimes even medical bills come with interest charges. If you do not pay attention to where you are paying interest it is easy to end up spending thousands of dollars a year on interest alone. This is basically money that you are throwing away. Cutting your interest payments can save you thousands of dollars a year and help you move more quickly toward your financial goals such as getting out of debt or saving for retirement. To get started on the process, first ask yourself where you are being charged interest. Once you know where you are paying interest you can get started on the process of reducing or eliminating your interest payments altogether.
Where are you paying interest?
Four of the most common places where people pay interest are on home mortgages, vehicles, credit cards, and student loans. If you have any or all of these loans it is highly likely that you are paying more than necessary on interest. In fact, if you pay the average amount of interest in each of those four categories your interest payments will be over $7,000 per year.
You may also be paying interest payments in surprising areas of your life. For example, if you financed your furniture you may pay interest monthly or be in danger of paying interest retroactively if you do not pay off the loan before the interest free period ends. Some people finance other purchases such as puppies and some finance medical or dental procedures that were not fully covered by insurance. It is important to take a look at your entire financial picture to determine where you are paying interest and how much money that represents on a monthly and yearly basis.
Ways to cut your interest payments
Ask for an interest rate decrease or pause
The recent difficulties in the job market and overall economy due to the Coronavirus pandemic has put many people in difficult financial situations. One good thing about the widespread financial impact of the pandemic is that many financial institutions are being more flexible when it comes to interest rates and payments. If you are paying high interest on one of your credit card accounts – call the credit card company and ask for a decrease on the percentage rate or a pause on interest. You may be surprised to find that your credit card provider has some options to reduce your financial burden.
Potential savings: $900 per year
Transfer your balances to a zero interest credit card
If you cannot get your current credit card company to reduce your interest rates, consider transferring your balances to a card with a zero percent or low introductory percentage rate offer. You may be able to find a credit card that offers anywhere from six to twenty four months of zero interest on balance transfers.
Potential savings: $900 per year
Consolidate your loans
There are some student loan providers and financial institutions that offer loan consolidations that can save you on interest. For example, if you have multiple student loans you may be able to lower your overall interest payments by consolidating the loans for an overall reduced rate. Consolidation can also help you streamline your repayment process and make it easier to keep tabs on how much interest you are paying.
Potential savings: $300 per year
Refinance your home
Refinancing your home can save you a significant amount of money on interest. Home interest rates have been hovering at almost all-times lows recently which is great news for anyone looking to refinance. The key to refinancing your home is to determine how long it will take you to realize the savings. Refinancing often comes with closing costs that you must consider. Dropping your interest rate by a fraction of a percent may not make the process worth it but going down by a full percent or more may provide you with significant savings on interest monthly and over the life of your mortgage.
Potential Savings: $3,200 per year
Refinance your car
If you have a significant car loan it may be worth considering refinancing. Take a look at your current interest rate and compare it to what you can get on the open market if you choose a different lender. Many banks and credit unions will list their current interest rates on their websites so you can quickly do the math to determine if you can save by refinancing.
Potential Savings: $600 per year
Refinance your student loans
Refinancing your student loans can save you money if you can get a lower interest rate. There are a number of companies that offer student loan refinancing. Factors such as your loan term, variable vs fixed rate, and private vs federal loans are all elements you need to understand before you start the student loan refinancing process. Take some time to learn about the type of students loans you have to ensure that you are making a refinance decision that will actually save you money.
Potential Savings: $300 per year
Important factors to consider
When you are faced with the reality of how much interest you pay each month and year, it will likely cause you to spring into action. Action is good! The only way to reduce your interest costs is by making some changes. However, do not allow your disgust at your high interest payments cause you to overlook some important factors. One factor to consider when you are consolidating or refinancing is the term length. For example, your home mortgage has a term length which is the amount of time it will take you to pay off the loan if all you ever pay is the minimum payment. When you refinance or consolidate a loan, you can shorten or lengthen the term. Lengthening the term will provide you with a lower monthly payment but may end up costing you more in interest over time. Shortening the term may increase your monthly payment but offer a lower interest rate and, ultimately, less paid in interest. Take some time to make sure you understand these factors before you make a decision about refinancing or consolidating.
The first step in saving money on interest and reducing your debt is to get a clear picture of where you stand with your finances today. Open a spreadsheet or get out a pencil and some paper and lay out all of your accounts that charge interest. Look at your credit card agreements or log into your online accounts to learn the annual percentage rate for each account. Once you have all of that information you can add up how much you’re paying in interest each month and start taking the necessary steps to reduce those interest payments and save money. Saving money on interest and saving money on the things you buy every month – like groceries – can help transform your financial picture in a relatively short amount of time.
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