How to Reduce Your Loan Interest Rates (And Get Out of Debt)

Paul Atherton |
01-10-2021
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Vintage Photo of a Loan Advertisement on side of building that reads "Loans on your salary $5 to $50"
There are easy and clever ways to reduce your interest rates—here’s how.

One of the best ways to effectively manage your debt is by reducing the interest on your loans. My favourite way to reduce interest is with debt consolidation.

For most Australians with debt, it’s not the principal of their loans that’s killing them; it’s the interest.

Credit card companies and lenders are not in it for charity—they’re in it to make money, and they do that through charging interest on their loans.

To consolidate your loans, you need to find a lender that will take on all (or most of) your outstanding debt and restructure it into a new loan.

One of the best ways to consolidate debt is with a mortgage. I often say that if you have a mortgage, you shouldn’t have any other loans (except HECS).

How to reduce interest rates with mortgage consolidation.

The debt on your house has a much lower interest rate than your credit or personal loan debt.

Why?

Because it’s a mortgage, there’s security there. If the bank needs to recover the money that they lent you, they can sell that house. Whereas with a credit card, you can spend it on anything, and it will be nearly impossible for the bank to get their money back.

That’s the primary reason why, but check out this article if you want to read a bit more about it.

In Australia, the interest on a mortgage is about 3% to 6% per annum. But the average interest rate for purchases on a credit card is 19.94. That’s a crazy amount; it’s a huge difference.

Now imagine that you took that money you owe, that you’re paying 19.94% interest on, and added it to your home loan. Now, you only have to pay 3% to 6% interest on it. That’s a massive saving.

But what’s more, because it’s now part of your home loan, that credit card debt will be paid slowly over the length of your mortgage (so, for most people, that’s 30 years).

That means that your monthly payment for that credit card has gone down massively.

Unfortunately, it also means that you’ll feel like that credit card debt is gone. But it hasn’t. You still have that debt, and you still need to pay it back, so don’t take out another loan.

It’s crucial to maintain discipline to pay off your outstanding debt.

Can you consolidate your debt without a mortgage?

Yes. If you don’t have a mortgage, you can still consolidate your debt. People usually do this through credit card consolidation.

Now, I never usually recommend doing this, but it can be helpful in certain situations.

Many lending institutions offer credit cards with a 0% interest fee on balance transfers over a short period.

This 0% fee means that you can take your high-interest credit card loans, move them over to your new card, and stop paying interest on your loan. Remember that this isn’t usually free—often, there are transfer fees, annual fees, or other costs involved.

But remember, credit card companies aren’t in it for charity. They want to make money.

So, why would they offer 0% interest?

These companies know that people who have gotten themselves into financial trouble in the form of debt rarely get out of trouble, even if they want to.

Many people take advantage of these 0% interest fee offers and transfer their debt over but can’t pay their loans off before the 0% period expires. Then, the interest fee jumps up (usually higher than the average and higher than your old card), and suddenly the credit card company is making a whole lot more money.

That’s why I generally don’t recommend people consolidate onto a new credit card, at least not without first getting some financial advice.

Usually, people need some additional assistance in other aspects of their financial life before taking this leap.

You also need to be very careful with what card you transfer to.

There are a lot of options out there when it comes to 0% interest cards. Some of these cards only offer 0% interest on balance transfers, not purchases.

So, if you start purchasing on that card, you’re going to be paying the colossal interest fee on that purchase. So, if you make a purchase and you’re charged interest, you need to pay it straight away because interest is added straight away—not next month; it’s charged now.

You can probably see how that can quickly add up and get you in a lot of trouble if you aren’t paying close attention. Some people have doubled their debt because of this and would have been better off staying on their original credit card.

It’s easy to do too. I even wrote an article on why buying on credit becomes an easy habit.

So, if you’re going to go against my general advice, and transfer your credit balance to a 0% card, cut that new card up straight away. Don’t purchase anything on it. Please get rid of it.

Then, pay it off over the interest-free period, and pat yourself on the back at the end of it.

Is there another way to lower my interest rate?

So, you don’t have a mortgage, and you’ve realised that transferring your balance to a new card isn’t the right move for you. What now?

Well, you can still lower your interest rate.

You might be surprised, but I’ve found that you can call up your lender and ask for a lower rate.

Yep. All you must do is ask!

If you’re nervous about it, you can write up a script before calling. If you do a little bit of research beforehand on the interest rates other companies are charging, you can go into the call with some evidence to back you up, and you should get a good result.

There are even credit helping agencies that can get your interest rates lowered for you. Some will walk you through it, and others will talk to the lender on your behalf.

Here’s my guide for getting your interest rate lower.

  1. Go to Google, check out what the current rates are.
  2. Find a credit card offering a lower rate, say a card with 10% interest compared with the 25% you’re currently paying. Write down what it is.
  3. Call your lender.
  4. Tell the person that your current interest rate has a significant negative impact on you financially.
  5. Tell them that you would like your interest rate lowered to the card rate you just researched.
  6. They should say yes. But if they don’t, ask to be transferred to the department that can make the change for you.
  7. Repeat the script.
  8. If you’re still hitting brick walls, ask to speak to a supervisor, and repeat your script.

In my experience, asking for a lower interest rate works. The success rate is far higher than the failure rate.

And why wouldn’t it be? They want to keep your business. They want you to pay that interest. It’s better than you failing to pay at all.

So, when it comes to lowering your debt interest rates, remember…

  1. Move any other debts over into your mortgage—mortgage consolidation is the easiest and best way to reduce interest rates.
  2. Be wary of 0% balance transfer credit cards—if you think you could benefit from consolidating your loans onto a new card, talk to a financial advisor.
  3. Call your lender and ask for a lower interest rate—it works!

For more tips on managing debt, sign up for my newsletter below.

This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.

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