Okay, so we’ve all seen ads for 0% APY credit cards and low-interest mortgages.
Still, few of us have actually ever stopped to think about how much we’d actually save from low interest rates.
Depending upon how much you owe, your current interest rates, and the new, lower rate offered, the savings could in fact be enormous.
Here are a few real-life examples to illustrate:
Lower Student Loan Rates
If you’re paying off student loans, you’re well aware that a large component of your payment is interest, alone.
(In fact, it’s not uncommon for the majority –or all – of your payment to go to interest when you first begin repayment.)
Let’s say you’re carrying the national average student loan balance of $29,600 at the 3.9% interest rate that is currently typical for many federal loans for undergraduates.
Let’s also assume you make $50,000 per year and wish to pay your loan off over the standard 10-year repayment plan.
According to studentloans.gov, you’ll be paying $298 per month or almost $36,000 over the life of the loan.
If you took out loans with a higher interest rate – say, the 7.75% that is more typical for some graduate/professional school loans (or private loans for those with poorer credit) – you’d be paying much more.
In this case, you’re paying $355/month or $42,000 over the life of the loan, instead. That’s an extra $6,000 you’d owe in interest, alone!
Lower Mortgage Rates
Let’s say you have a 30-year fixed mortgage balance near the national average of about $165,000 (those of you in high cost-of-living states like California or New York, please contain your laughter).
With an interest rate of 7%, you’re paying about $1,100 per month, or $395,000 over the life of the loan.
If you secure a lower interest rate, such as the current 30-year fixed average of 4.4%, you’re paying only $826 per month or $297,000 over the life of the loan.
That’s about $300/month less – but more importantly, a savings of nearly $100,000 over the life of the loan!
If you have good credit, you may qualify for even lower mortgage rates, and even bigger savings.
The Impact of Good Credit
Lower interest rates, of course, can reduce your total cost on a number of other loans, too, such as car notes, appliances purchased on credit, or credit cards.
(Credit cards merit special mention, since interest rates can in some cases exceed 25%.)
The difference in overall cost of debt can in some cases be reduced by many thousands for people who qualify for lower interest rates based on good credit.
Generally speaking, the better your credit, the lower the mortgage rates, credit card interest rates and car note rates you qualify for.
In our examples above, an individual who benefited from lower interest rates on their mortgage and student loans saved over $100,000 and enjoyed lower monthly payments.
That’s money that could’ve been put to other uses – emergency savings, dream vacations, or retirement funds. Interest rates cost you financially, but most importantly, they can impact your quality of life.
Read more here about improving your credit.
And get personalized Ways to Save through offers such as lower-interest credit cards on Mint.com.
Janet Al-Saad is the founder of the Five Ten Twenty Club, a website designed to help you improve your finances $5, $10 or $20 at a time.