You may be feeling the pinch from the many demands on your finances right now, due to household bills going up and rising interest rates.
As part of a move to get your finances back under control, you might be wondering if there are steps you can take to reduce your monthly personal loan repayments and cut loan costs.
In this article we set out:
- How to switch to a low-cost loan or shorter deal
- The fees to watch out for
- Whether to repay your loan early
- What to do if you can’t afford to repay your loan
How can I reduce my loans?
There are two types of loan:
- secured (where you borrow using assets such as a house as security)
- unsecured (where there’s a formal contract between you and the lender)
A personal loan is unsecured, which means your home is not at risk. It is a relatively low-cost loan that you pay back over a fixed term (usually between one and seven years) via regular monthly payments.
The options set out below are for reducing the cost of unsecured loans
Switch loans
Borrowing rates are no longer at record lows now Bank of England has been raising interest rates. But if you took out a personal loan with a high rate of interest in the past, you might now be able to cut costs by taking out a new low-interest loan to pay it off.
You might also be able to save by switching to a shorter deal, as the quicker you pay the money back, the less the loan will cost you.
But before making any move, the key is to do the maths.
If you are thinking about switching to a cheaper loan, you need to find out the “settlement figure” – just how much it would cost to pay off your loan with your existing lender right now, including both the full debt along with any early-repayment charge.
To get this, you will need to call your lender.
If you are considering reducing the length of the loan, note that your monthly repayment might actually go up. But the point here is that you will cut your costs because the total amount of interest you pay will be lower – plus you will have paid off your personal loan sooner.
Option 1: Switching to a loan with a lower interest rate
According to the government-approved advice service Money Helper, if you took out a loan of £5,000 over a term of three years at a rate of 15%, the cost of paying off the loan would be £1,239.76.
But if you moved to a cheaper rate of interest of 10%, the cost would drop to £808.09 – a saving of £431.67.
Option 2: Save by reducing the length of the loan
Money Helper reports that if you took out a loan of £5,000 over a term of five years, at a rate of 8%, your monthly repayment would be £101. The cost of the interest over the lifetime of the loan would be about £1,083.
If you reduced this to a term of three years, your monthly repayments would increase to £157 – but as you would be making these for a shorter period, the cost of interest over the lifetime of the loan would drop to about £640, which represents a saving of £442.
Also, with moving to a shorter deal, the comparative totals for the monthly repayments are £6,060 for the deal over 5 years and £5,652 for 3 years, which is a saving of £408.
While you’re cutting loan costs, why not see if you can save on your mortgage, too. See our guide: Is now a good time to remortgage?.
Look for the best low-cost loans
When searching for a low-cost loan, the key thing you need to understand is the interest rate. This is known as the “representative annual percentage rate” (APR).
If you are looking to trim costs, you will want a loan with a low APR, meaning smaller monthly repayments.
As new loan deals are introduced all the time, and as lenders frequently tweak their rates, the best way to find the right low-cost personal loan for you is to go to comparison websites and run the rule over the different deals.
While interest rates on loans can vary, a low-cost personal loan could mean a rate of around 5.6% for a £10,000 loan over five years.
Be aware that to get the very best rates, you will need to have a tip-top credit score, based on your financial circ*mstances.
Remember that the representative APR on a personal loan is the rate that at least 51% of borrowers will be charged – and not the rate you are guaranteed to get. The actual rate you are offered could be quite a bit higher.
See here for more information on the ins and outs of taking out a personal loan.
Avoid high loan fees
When signing up to a personal loan, or making your payments, take care not to get stung with bank loan costs, such as an arrangement fee or an early-repayment charge. These could affect the cost of the borrowing.
Also watch out for late-payment charges if you fail to make your monthly repayments on time. Be sure to scour the terms and conditions, as any fees must be set out in your loan agreement.
The best low-cost loans have a low, fixed APR, no arrangement fee and no early-repayment charge.
Pay off your loan with a credit card or savings
As the rate you pay on your debts is almost always higher than the rate you earn on money slotted away, it usually makes sense to repay loans using savings.
But this will depend on you having sufficient money squirrelled away. And remember that it’s vital to consider keeping some money back in a rainy-day fund, in case of emergencies.
Alternatively, you could think about moving your personal loan debt to a credit card with an introductory offer that gives you a low-interest – or 0% – grace period. See our guide here to the best balance transfer credit card deals.
This will give you a decent amount of time to reduce your debt without paying large amounts of interest.
With a credit card, should you want to clear the balance early and stop borrowing, you can do so.
But check for any fees, as you need to be sure the move is cost-effective, and also note that if you don’t manage to wipe out the debt by the end of the card’s interest-free period, high rates of interest could kick in.
Find out more here about the pros and cons of loans and credit cards.
Is it cheaper to pay off my loan early?
While using savings can be a good way to clear your loan, if you do decide to do this before the end of the agreed term, you may be stung with an early-repayment charge.
Scrutinise the Ts and Cs to see if any charges apply.
If the fees are high, you need to do the maths to see if this cost is worth paying.
Should I consider a debt consolidation loan?
If you have built up lots of expensive debts, one option might be to consolidate. This is where you merge multiple debts – including credit cards and personal loans – into one place.
This new loan may have a lower rate of interest than you were paying previously, meaning more affordable monthly repayments.
Tread carefully, though, and especially if the borrowing is secured against your home; this type of loan can often have a much longer repayment term than an unsecured loan.
Read here for more about getting on top of your debts.
What happens if you can’t afford to pay a loan?
Even if you are feeling that there’s no way out with your debts, there are some simple steps you can take to help you get things back on track.
First, you can contact your loan provider and ask whether you can bring down the payments. Lenders may be able to provide support, such as a payment holiday or a period of reduced payments or reduced interest, or a repayment plan.
They will need to look at your particular financial circ*mstances and what you can afford right now – and in the future.
You could also seek free help from a debt-advice charity, such as
For more information on getting your finances under control, read: How to manage your debts.
Budgeting also has a big part to play in ensuring you stay in the black. For more tips on how to better manage your money, read our Simple guide to budgeting.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
