Lower loan installment is every borrower’s dream. Its amount is determined by the amount of debt, interest rate or repayment period. We do not have any influence on most of these parameters during loan repayment, but there are several methods by which the repayment installment can be lower by up to several percent.
There are several ways to reduce your loan installment. However, the key is to answer the question what effect we want to achieve and for how long we want to lower our installment. It is worth remembering that almost every solution is associated with higher costs throughout the repayment period.
If we anticipate difficulties with repayment of 1-3 installments, then a temporary suspension of repayment, commonly known as credit vacation, may be a good solution. Almost every bank allows the possibility of postponing the payment of at least one installment. However, this option can only be used by customers paying their installments on time. At the same time, we cannot take credit holidays too often. Most often, we may not pay the installment only once every 12 months, many banks also introduce a quantitative limit, i.e. in the entire repayment period we can use this facility up to 3 times. Another important note about credit holidays is to plan them properly. We must inform the bank about the will to suspend repayment, at least 7 days before the planned repayment date. Therefore, it is not a solution for people who only on the day of payment realized that they are unable to pay the installment.
Extension of the repayment period
Another tool that will help you permanently reduce your loan installment is to extend the repayment period. If we originally indebted for, for example, 25 years, then in most institutions we will be able to repay the loan 5-10 years longer. In this situation, we must apply to the bank with the appropriate application, and after signing the annex and extending the period, the loan installment will decrease. If we took a loan for 25 years, we pay about $ 550 per month for every 100,000 debt. Extending the repayment period by 5 years means an installment lower by approximately $ 50. The next five years mean a further reduction of the installment – in the case of a 35-year repayment period, the monthly installment is approximately $ 470 per 100,000 loan.
Decreasing installments and equal installments
Another way to permanently lower your installment is to change your repayment system. If we repay the loan in decreasing installments, depending on the interest rate and repayment period, for about 30 percent of the initial loan period, the monthly installment will be higher than the installment of an equivalent loan, but repaid in equal installments. However, changing the repayment system from decreasing installments to equal installments at any time during the loan period will always result in a reduction in the monthly installment. Therefore, if we repay the loan in the system of decreasing installments and they are too much a burden for us, then the change to the system of equal installments will bring relief and smaller payments. For example, if we took a loan of 100,000 dollars for 30 years 3 years ago, today the monthly installment will be around 615 dollars. For 36 months, the loan amount decreased by $ 10,000. A change to equal installments at this time will bring a reduction of the monthly installment to $ 480. It is worth noting that in the situation of leaving the loan in decreasing installments we will reach this level of the monthly installment only after the next 11 years of repayment!
Buy currency alone
A way to reduce your installment is to buy the currency yourself to pay your monthly installments. People who have been indebted in foreign currency for several years are no longer required to purchase foreign currency at the bank where they pay their liabilities. It is possible to buy francs or euros yourself in an exchange office or other bank. It is worth comparing the sale rate in your bank, because in this way we can often save up to several dozen dollars a month.
Nothing for free
The reduction of the monthly installment in each of the ways described above, unfortunately results in an increase in the total costs over the entire repayment period. If we extend the loan repayment period from 25 years to 30, then this will mean an increase in total interest costs of over 23 percent. If we repay the loan for 35 years, we will pay 47 percent more interest than if we pay back the 25 year loan.
The situation is similar when the loan repayment system is changed. If we repay the loan of $ 100,000 for 30 years in decreasing installments, then we will pay about 67 thousand interest. However, if after 3 years we decide to change into equal installments, then the total interest cost will increase to over 78 thousand. For this reason, extension of the repayment period or change of the repayment system should be considered primarily by persons who have problems with maintaining financial liquidity. If the loan installment really exceeds our capabilities, it is worth, even at the expense of higher interest, consider one of the solutions. However, if we are able to pay installments, it is better not to take actions that will lead to an increase in loan costs.