There are a number of different ways to lower loan payments:
Longer term loans
Longer term loans are often the simplest answer to lowering a loan payment.
For example, a $10,000 loan at 10% interest for 3 years will have an annual payment of $4,021.15.
The same $10,000 loan at 10% interest for 10 years will have an annual payment of $1,627.45 – a much lower payment!
It should be noted, however, that the total interest paid in the 3 year scenario would be $2,063.44, while the 10 year scenario would be $6,274.54 – much more!
Making a loan a longer term will in most cases mean paying more interest over the total time of the loan.
Use a longer compounding term
A longer compounding term works to the benefit of the borrower – a shorter one works to the benefit of the lender.
Our $10,000 loan over 10 years at 10% interest has a payment of $1,627.45 when the interest is compounded annually – when it’s compounded daily, it is a payment of $1,663.67 – an extra $36.22 each payment!
The reason shorter compounding rates cost more for the borrower is because of the compound interest effect – interest is being paid on interest, as opposed to longer term compounding where it is not.
Negotiate a lower rate
Some lenders are willing to give a lower rate on their loan to keep the business on their books. In some cases it is a matter of calling and asking.
Consolidate the loan
Consolidating a loan can reduce the rate and with it the payments being made.
In many cases, a number of credit cards can be consolidated into one personal loan, or into a mortgage or secured credit line.
Use shorter payment periods
A shorter payment period will reduce the amount of total interest paid on a loan.
For example, our 10 year 10% loan compounded annually with annual payments of $1,627.45 would have daily payments of $4.33 – when that’s multiplied by 365 that would be $1,580.45 paid through the year – $47 less than with an annual payment.
Shorter payment periods reduce the total amount paid because it reduces the principal amount faster than longer term payments.