In an environment of readily available credit and stiff competition, accessing funds for your next purchase is at your fingertips. Interest rates are at all time lows, and lenders are competing more aggressively and vying for your business. Some Lenders are currently offering no application fees, no monthly fees and waiving early termination fees. The rhetoric is changing in the finance industry since the Hayne Royal Commission. It’s all about customer satisfaction, low margin and repeat business. Lenders are encouraging you to repay your loan early, providing you with the tools to do so (flexible product features).
With interest rates at historic lows and products being so flexible, it is the perfect opportunity to focus on repaying your loan/s sooner. Here are some tips to help you on your way.
Make regular, extra repayments
Sounds simple, but it is an extremely effective way to reduce your loan term. The interest charged on Regulated loans (those covered by the NCCP) are calculated on the daily balance. So, repaying more and paying it sooner, will reduce the overall interest charge. Consequently, your loan term will shorten
Here’s an example of the effectiveness:
Let’s assume you had a $ 35,000.00 loan, taken out over 7 years at an interest rate of 5.99% fixed. The fortnightly repayment would be $ 236.00. By repaying an additional $ 30 per fortnight from inception of the loan, it would equate to a saving of $ 1129 in interest over the term of the loan and 11 months off the original loan term. Simple but effective. Refer to our repayment calculator and run some scenarios to understand the true effect of making extra repayments
One off lump sum repayment
Similar to the principle of making regular, extra repayments; a one-off lump sum repayment would have the same effect in saving you interest and reducing your loan term.
Using the same scenario as above, a loan of $ 35,000.00 with a lump sum at Year 2 of $ 5,000.00 would save you $1545.00 in interest and reduce your loan term by 12 months.
Negotiate the interest rate
The interest charges are generally the largest cost associated to any loan. Therefore, the lower the interest rate is, the better. Now this may sound logical but lets rationalise it in the same scenario. Assume you have a budget of $ 550 per month and the interest rate on the loan is 4.99%. The minimum required repayment is $ 495.00 per month, which allows you to repay an additional $ 55 per month. If the interest rate was 7.99%, the repayments would be $ 546.00 per month. The additional repayment would be lower at $ 4 per month. The higher interest rate would cost you a further $ 683 in interest and increase your loan term by 7 months.
Do not Redraw
Redraw is a feature that allows you to access the surplus funds you have built up having made extra repayments. It can be convenient to have this product feature on your loan, however it can be a trap too. You have done the hard work and been disciplined in making additional repayments, only to to redraw those funds for another purpose. Of course, there could be valid reasons to access the surplus funds. But having the feature, it can often be difficult to resist the temptation of accessing it. And by doing so, you will increase your balance, your interest charges and your loan term.
Switch to another Lender
We recommend reviewing your loans regularly. We tend to review our home or investment loans; however personal loans are often neglected. It is important to review your loan frequently to ensure market competitiveness. I have provided examples of how important it is to reduce your interest rate and other loan costs such as monthly fees. Reductions in these costs lead to an overall reduction in the loan term if you continue to repay the original repayment.
The finance team at yesapproved.com.au can help you with your refinance assessment.
For further information, check out our blog on refinancing.
Do away with the minor luxuries
As tempting as it is to purchase the non-essentials, avoiding these expenses could save you much more. Instead, consider putting these funds in to your loan. The purchase of minor luxuries can be foregone, and likely should be if you have considerable debt. It can become overwhelming when you have taken on too much debt, but small steps make a big difference. Imagine giving up your daily “flat white” – hard i know – but $ 5.00 per day saved is nearly $ 2000 per year in savings. Use these funds to reduce your loan balances, and the effect could be substantial. It’s the small changes that matter the most.
Consolidate your loans
If you have several personal loans then consider consolidating them in to one, easy to manage repayment. Focussing on the one loan and repayment, makes more sense especially if the overall monthly repayments are reducing.
Chattel Mortgage and Lease contracts are entirely different contracts as they are Unregulated. The suggestions noted may not apply to Commercial loans, and the early termination fees can be significant. The full Interest charges associated to a Lease or Chattel Mortgage may be payable if you repay the loan out prior to the expiry of the contracted loan term.
For more information on the differences between Personal Loans and Commercial Loans read our blog.
The team at yesapproved.com.au are always available to answer your questions about your existing loan.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.