It is popular to talk about collecting loans that are smaller and more expensive to a larger one to save money. Here I will take a closer look at how much you really save on doing this.
If you look at the rules for various private loans and purchase on installment, you can see quite quickly that interest rates of over 20% are not at all unusual. Then there are some additional fees in the form of newspaper fees and the like, which means that the effective interest rate will be considerably higher than that. It is also not at all uncommon for interest rates or effective interest rates to start approaching 30% or higher.
USD 50,000 with 30% interest
We choose here to first look at a person who has USD 50,000 in debt and then with a really high average interest rate of 30%. The loans are repaid according to annuity (5 years) which I will also use for all calculations here. Then the person would pay almost USD 1,620 every month to cover interest costs, amortization and other fees. In total, during the five years, there will be an astonishing total loan cost of almost exactly USD 47,000, to which will then be the amortization of USD 50,000.
As I write this, bank has a list interest rate for its private loans of 3.97 – 8.95%. All the big lenders tend to be pretty similar when it comes to interest rates, so we can probably start from bank and then think that everyone else can conceivably be about the same.
Now, a loan of USD 50,000 is calculated at a major bank as a rather small sum and we also choose to predict that the borrower does not have the best finances. As a result, the interest rate will probably fall quite far in the range. We therefore take and expect 9% interest and then the same repayment period and size. Then the borrower would have to pay USD 1,040 every month, which is almost USD 600 less than the original loans cost. The total cost of the loan would be USD 12,300 in interest expenses. This is the question of a saving of USD 34,700 .
USD 100,000 with 20% interest
Now we assume that the person has even more debt but that the interest rate is a little better on these. The loans cost ISF with a 20% total of almost USD 59,000 and the monthly payment is USD 2,650. A rather hefty sum thus, but we can see a clear difference in cost compared to the more expensive interest rate we calculated earlier when these loans are twice as large but are far from costing twice that.
We now also choose to expect that the bank that lends money to repay the loans is a little nicer with its interest rate since that is the question of a larger loan. We therefore expect 7% interest. The cost of that loan will then be USD 18,800 or USD 1,980 per month. The monthly cost is thus approximately USD 700 less and the total savings is USD 40,200 .
USD 300,000 with 20% interest
As the last common example, we take someone who has attracted amounts of bad loans so that the total amount has reached USD 300,000. We continue to set interest rates at the same level, although it could well be larger. The total interest cost for these loans would then be USD 177,000 and the monthly payment is USD 7,950.
We still choose to remain at the same level of interest rates as in the previous example, which was 7% at the bank. In general, it should clearly be possible to get a lower interest rate than this, but the idea here is not to go on with any joy calculations but to show good examples of what it can give. If it is possible to get a lower interest rate, then even more money is saved, which is positive. Hence the monthly cost here is USD 5,940 and the total cost of the loan is USD 56,400.
If a person has taken on such large expensive loans, then it is possible to calm down the opportunity to save about USD 2,000 per month by getting a better loan. The total savings here would be as much as USD 120,600 . Which is a lot of money that most of us can undoubtedly use for something better. For example, it is not far from the cash contribution for a house that costs a million.
USD 200,000 with 8% interest
The last example I was thinking of looking at is a loan where the interest rate is not particularly bad, but there is an offer for even lower and what it is possible to give. USD 200,000 with 8% costs a total of USD 43,300 which is not so dangerous compared to the others we have looked at.
But the question then is whether it is worth trying to get an even better loan. We say it is possible to get almost the lowest possible interest rate, we take and expect at 4.5%. The cost will then amount to USD 23,700 for the loan, which is a saving of USD 19,600 . So this is a lot of money too, which shows that it can clearly be worth trying to get a cheaper loan even if the others are not really expensive.
Should I collect loans?
The short answer to this is that yes you should. Submitting an application to Lendo (or any other loan broker) or contacting your local bank will not cost you more than time. If you find out that you can get a lower interest rate for the loans, just run it as you will save money.
Then of course it is extremely difficult to say how much money you save in advance, since it is all about the size of your previous loans and what interest rates they have. Then the other important factor is what you get for some new terms on the new loan. But it is possible to save thousands of dollar per month or tens of thousands of dollar in total there is no doubt. Saving so much money is pretty nice if it only costs a little time.
Another positive factor is that it is much easier to keep a large loan in order than many smaller ones.