How to reduce your loan payments

The best approach for reducing your monthly payments on an unsecured loan depends on whether you’re looking to save some cash or if you’re struggling to afford what you owe. This guide provides information for both scenarios.

Reducing monthly unsecured loan payments by switching providers

If you took out an unsecured loan when interest rates peaked, the chances are that you’re paying higher interest than you need to. 

Switching to a lower-rate loan can be a quick way to save money, but you need to be careful. Most unsecured loans have early repayment charges, which means you will be charged a fee if you switch to another product. 

You need to determine whether the amount you’ll save in interest is greater than the settlement charge you will receive if you prematurely end your loan agreement. If you took out the loan after February 2011, you are allowed to make full or partial repayments of up to £8,000 a year without paying any fees. Above this, you may well be charged, but there are caps involved.

Call your loan provider and ask them to confirm what your settlement fee would be. Then you can use our loan repayment calculator to see the difference in total interest between your existing loan and any new loans. Add the settlement charge to the “total cost of credit” for the new loan, and if that’s cheaper than the cost for the existing loan then you should consider switching.

Find the best low-interest loan products with our guide

Reducing monthly payments with an interest-free credit card

Before switching to a new loan, it’s worth investigating whether you’re eligible for an interest-free, balance transfer credit card. These products allow you to move existing debts across without paying any interest for a set period. This means that all your repayments go towards repaying the amount you borrowed (the capital) rather than paying interest. 

Typically, there will be an upfront fee for this type of card, and you may still have to pay any early repayment charge on your loan. You should compare the total fees for the card and exiting the loan with what you expect to pay in interest if you continue with the loan. If you’ll save overall, then it's worth transferring your balance to a card. Make sure you check the terms and conditions, as not all balance transfer cards allow transfers from personal loans, but many do.

What to do if you’re struggling to keep up with repayments

Speak to your lender

If you’re struggling to meet your monthly loan repayments, then you should act swiftly to protect your credit rating. The first step is to call the lender and explain the situation. They may be able to offer you a payment plan, payment holiday, or even extend the term of your loan.

Make sure you fully understand all the implications of these steps. For instance, taking a payment holiday will give you some breathing space, but interest is likely to continue being added, which means payments will be higher when you resume. Extending the loan will give you lower monthly repayments, but increase your overall cost of borrowing as you’ll pay more in interest.

For help negotiating with your lender, consider speaking to a free, independent debt charity. The main ones are:

• StepChange

• National Debtline

They can help you understand all the options available and may even be able to negotiate with lenders on your behalf to develop a debt management strategy.

You could also speak to Citizens Advice, whose advisers can help you navigate problem debt. Also, make sure you check the Turn2Us website to see if you’re eligible for any benefits or grants from the government.

Can I cancel my loan repayments?

While you can cancel your loan repayments, for instance by stopping the direct debit or standing order, this is likely to have significant financial consequences. You’ll still owe the money, and interest and late payment fees will likely be added. 

If you miss several repayments, you will default on the loan, which has severe effects on your credit rating, and you could even result in you receiving a County Court Judgment. If you have important bills that need paying, call your loan provider and ask whether a payment holiday is possible instead.

Should I get a debt consolidation loan?

If you have many debts that you are struggling to manage, you might want to consider a debt consolidation loan. These products wrap all your debt into one, simple monthly repayment. This can make it easier to keep track of everything and sometimes even save you money.

However, you need to check whether the debt consolidation loan interest rate is lower than all (or most) of your existing debt interest rates. If not, you’ll pay more interest over the term of the loan, even though your monthly repayment might be smaller. This may be a trade-off that you’re willing to make, but it’s important to make sure you fully understand the decision you’re making and its impacts.

Learn more about debt consolidation loans and compare the rates on offer