How to Reduce Loan Overpayment: Practical Tips to Save Money

Have you ever thought about how much it actually costs to service a loan from a bank? How can you determine the total amount you will end up paying, and what factors influence the final cost? Many people assume that they cannot affect the total loan overpayment and that the bank solely determines it. However, this is not true.

How is the loan overpayment calculated, and why might it end up being higher than expected?

Loan overpayment is the amount a borrower pays beyond the principal debt, including interest, fees, and possible insurance payments. The higher the overpayment, the more expensive the loan becomes. That’s why it is crucial to understand how to minimize your expenses. Let’s explore how to avoid unnecessary costs and optimize loan conditions.

What Determines Loan Overpayment?

Loan overpayment consists of several key factors:

1. Interest rate – This is the main factor, often perceived as the final cost of the loan. However, the rate may be variable, increasing uncertainty.
2. Fees and insurance costs – Many banks add extra charges that make the loan more expensive.
3. Loan term and repayment schedule – The longer the loan term, the more interest you will pay over time.

What Makes Up Loan Overpayment?

The total loan overpayment is primarily determined by three parameters:

1. Interest rate – This is the main cost factor. The higher the rate, the greater the overpayment.
2. Loan term – The longer you repay the loan, the longer the bank charges interest on the remaining balance, leading to higher total costs.
3. Fees and hidden charges – Some banks charge extra fees for loan application processing, cash withdrawals, or account maintenance.

Insurance – Some banks require insurance, such as borrower’s life insurance. In case of an insured event, the insurance company covers the debt, but insurance costs increase the total overpayment.

To save on loans, you must consider all these factors.

How to Reduce Loan Overpayment: Proven Methods

1. Choose a Loan with a Low Effective Interest Rate

The advertised interest rate is not always the actual cost of the loan. You should always check the effective interest rate, which includes all fees and additional costs.

In Armenia, banks are legally required to display the effective interest rate. On the AFM platform, we publish this rate because it provides the most accurate cost estimate for borrowers.

Banks Offering the Lowest Loan Rates in Armenia

When selecting a loan, focus on the effective rate, not just the base rate, as it includes fees for loan issuance, account maintenance, and other costs.

2. Avoid Unnecessary Fees

Some banks charge additional fees for cash withdrawals, account setup, or loan servicing. These can include:

1. Processing fees
2. Mandatory loan insurance
3. Transaction or payment processing fees

Example fees charged by Armenian banks:

1. Evocabank – 2,000 AMD for account opening
2. Mellat Bank – 0.35% fee for cash withdrawals
3. AMIO Bank – 1,500 AMD for account opening

Top 3 Banks with No Fees on Unsecured Consumer Loans:

1. Byblos Bank Armenia – Salary Loan
2. ArmSwissBank – Consumer Loan
3. Converse Bank – SNAP Consumer Loan (automated decision system)

These loans do not include fees for cash withdrawals, fund transfers, application processing, or other additional charges.

3. Pay Off Your Loan Early If Possible

The shorter the loan term, the less interest you pay. This is because interest is charged on the outstanding balance, and the longer you hold the loan, the more you pay.

How early repayment saves money:

1. A 5-year loan with a 20% annual interest rate and annuity payments results in an overpayment of ~589,633 AMD.
2. If you shorten the loan term:
3. To 2 years, you save ~368,134 AMD.
4. To 3 years, you save ~251,744 AMD.

Tip: Even if you initially took out a long-term loan, you can make extra payments whenever you have additional funds. Banks charge interest on the remaining principal, so by reducing the principal, you also reduce future interest payments.

4. Use Credit Cards with a Grace Period

If you need short-term financing, a credit card with a grace period can help you avoid interest. Some Armenian banks offer cards that let you use funds without paying interest for 15-60 days.

Best Credit Cards with a Grace Period in Armenia:

1. Ameriabank (Visa Gold, MasterCard Gold, MasterCard Rose Gold)
2. Grace period: 30 days
3. Monthly fee: 2,000 AMD
4. Ardshinbank (MasterCard Standard)
5. Grace period: 15 days
6. Monthly fee: 500 AMD
7. Converse Bank (Student Card AMD)
8. Grace period: 15 days
9. Annual fee: 3,000 AMD

Important:

1. Check the card maintenance fees.
2. Understand grace period conditions (e.g., whether you must pay off the full balance at once).

If used correctly, a credit card with a grace period can be a free alternative to a loan.

5. Optimize Long-Term Loan Repayments

Even for long-term loans like mortgages, you can find ways to reduce costs:

1. Apply for the longest term initially, but repay early whenever possible.
2. This keeps monthly payments lower while allowing you to reduce interest costs with extra payments.

Pros & Cons of a Long-Term Loan with Early Payments

Pros:

1. Lower monthly payments than short-term loans
2. Flexibility to make extra payments when possible
3. Interest is charged only on the remaining balance, reducing overpayment

Cons:

1. In the early years, most payments go toward interest, not the principal
2. Some banks charge penalties for early repayment
3. If you don’t make extra payments, the loan will cost more in the long run

Example:

1. A 20-year mortgage of 10,000,000 AMD at 12% annual interest results in a total overpayment of ~16,000,000 AMD.
2. If the term is reduced to 15 years, you save up to 5,000,000 AMD.

However, some banks charge early repayment penalties, so always check this before taking a loan.

Conclusion: How to Minimize Loan Overpayment?

If you can afford high monthly payments, choose a short-term loan to save on interest.

If your income is unstable, take a longer-term loan with early repayment flexibility.

Key rules to avoid excessive loan costs:

1. Choose banks with low effective interest rates.
2. Check for hidden fees before applying.
3. Shorten the loan term whenever possible.
4. Pay off your loan early (if no penalties apply).
5. Use credit cards with grace periods for short-term financing.

Plan your loan repayments in advance and avoid overpayments! Share these tips with your friends so they can save too!

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