The cost of credit: How to reduce it?

The cost of credit represents all the expenses that the borrower must bear to repay their loan. This cost includes not only the borrowed capital, but also the interest, processing fees, insurance, and other additional fees. Reducing the cost of credit is therefore a major challenge to lighten the financial burden of a loan, whether it is a mortgage, a consumer loan, or another type of financing. This article explores strategies to reduce this cost by optimizing interest rates, limiting additional fees, and choosing the right repayment options.

Optimize interest rate

The interest rate is one of the main factors influencing the total cost of credit. The lower the rate, the lower the cost of credit. Here are some strategies to obtain a more advantageous interest rate:

• Compare offers: Before taking out a loan, it is essential to compare offers from several banks and credit institutions. Use online comparators to get an overview of the interest rates offered in the market.
• Negotiate with banks: If you have a good financial record (stable income, low debt), do not hesitate to negotiate the interest rate with your bank. You can also play the competition to get better conditions.
• Opt for a fixed rate: A fixed rate protects you against interest rate increases during the loan term. This can be advantageous if rates are low at the time of subscription.
• Take advantage of market conditions: Interest rates vary depending on economic conditions. Taking out a loan when rates are historically low can significantly reduce the cost of credit.

Limit additional fees

In addition to interest, many additional fees can increase the cost of credit. Here's how to reduce them:

• Negotiate processing fees: Processing fees can represent a significant part of the total cost of credit. Do not hesitate to ask for a reduction or waiver of these fees when negotiating the loan.
• Choose a competitive borrower's insurance: Borrower's insurance is often mandatory for mortgage loans. Compare insurance offers to choose the one that offers the best value for money. You can also take out an external insurance rather than the one offered by the bank, if it proves to be more advantageous.
• Avoid costly options: Some options, such as deferring payments or changing monthly installments, can result in additional costs. Evaluate their usefulness before accepting them.

Optimize repayment terms

The way you repay your loan can also influence its total cost. Here are some tips to optimize repayment terms:

• Repay in advance: If your finances allow it, consider repaying all or part of your loan in advance. This helps reduce the total amount of interest paid. However, make sure that your contract does not provide for early repayment penalties.
• Opt for a shorter loan term: The shorter the loan term, the less interest you pay. If you can afford higher monthly payments, consider shortening the term of your loan.
• Modulate monthly installments: Some credit offers allow you to adjust monthly installments up or down according to your financial capacity. By increasing your installments when you can, you reduce the remaining capital and therefore the interest.

Real-life examples

Let's assume that a borrower takes out a mortgage of €200,000 over 20 years at a fixed rate of 1.5%. By negotiating a rate reduction to 1.2%, they save approximately €6,000 on the total cost of credit. Similarly, if they repay €20,000 in advance after 5 years, they significantly reduce the remaining interest, saving several thousand extra euros.

Laws regulating the cost of credit

The cost of credit is regulated by the Consumer Code, in particular articles L312-1 to L312-93. These texts specify the obligations of lenders in terms of transparency, the rights of borrowers, and the conditions for early repayment. It is important to understand these provisions to optimize the cost of your credit.

Conclusion

Reducing the cost of credit is essential to lighten the financial burden of a loan. By optimizing the interest rate, limiting additional fees, and choosing the right repayment terms, borrowers can save thousands of euros on the total cost of their credit. Before taking out a loan, it is recommended to carefully study the available offers, negotiate with banks, and consult a financial advisor to make the most advantageous choices.