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At A Glance
- Interest is a normal cost of borrowing, but the total amount you pay isn’t always written in stone.
- Borrowing less and reducing the loan balance sooner can help reduce interest over time.
- A longer loan term can lower repayments while increasing the total cost of the loan.
- Extra repayments and offset accounts can help reduce interest when the loan allows for them.
- The lowest rate isn’t automatically the lowest-cost loan once fees, features and the overall loan setup are considered.
- Choosing the right loan setup means balancing manageable repayments now with the long-term cost of borrowing.
Interest Is Normal. Overpaying Isn’t.
Paying interest can sting. Nobody enjoys seeing part of their repayment go towards the cost of borrowing instead of knocking down the loan itself.
But if finance lets you buy a home, car or another asset before you could otherwise afford to pay for it outright, interest is just part of the deal.
The better way to think about it is as a cost you can influence.
You may not be able to avoid interest altogether, but the amount you end up paying largely depends on a few factors.
Table of Contents
Borrowing Less Means Less Interest
Every extra dollar added to the loan has a cost attached to it.
So one of the easiest ways to reduce the cost of borrowing is to borrow less in the first place.
People often focus on how much they can borrow, but the better question is how much they actually need.
If you can contribute more cash, use a larger deposit or avoid rolling every fee, accessory or extra into the loan, you’re reducing the amount that interest is charged against from day one.
The same thinking applies when using equity. Just because there’s more available doesn’t mean using all of it is automatically the right move.
Lower Repayments Can Cost More
It’s easy to look at two loan options and assume the one with the lower repayment must be cheaper.
Not necessarily.
One of the easiest ways to bring a repayment down is to stretch the loan over a longer term, like when someone chooses a 40-year mortgage. That can be useful when keeping the monthly budget manageable is the priority, but it also means the debt may be hanging around for longer and attracting interest along the way.
A shorter term generally pushes the repayment up, but if you can comfortably afford it, you may pay the loan down faster and reduce the total interest paid.
For example, take a $600,000 principal-and-interest mortgage at 6%, assuming the rate stays the same. Total repayments would be about $1.03 million over 20 years compared with $1.30 million over 30 years.
That’s a difference of roughly $263,000.
This is where I’d rather look at the trade-off with you than simply chase the smallest repayment. A repayment needs to work for your budget, but we should also understand what that convenience may cost over the life of the loan.
Extra Repayments Can Really Help
If your loan allows it, paying more than the minimum can be a practical way to reduce the debt sooner and potentially cut the amount of interest you pay over time.
You don’t necessarily need to make huge lump-sum payments either. Smaller extra repayments made consistently can add up, particularly when you’re dealing with a loan that may otherwise be around for years.
Just check the rules first. Some fixed-rate loans limit additional repayments, while redraw access and other conditions can vary between lenders and products.
Make Your Savings Work Harder
If you have a home loan, an offset account can be one of the most effective ways to reduce the interest you’re charged without actually locking that money away.
With a 100% offset account, the balance sitting in the account is offset against the home loan balance when interest is calculated.
So if you owe $500,000 on the mortgage and have $30,000 sitting in the offset, interest would generally be calculated as though you owed $470,000 while that money remains there.
That can be useful because your savings are still accessible, but they’re also helping reduce the amount of interest being charged.
Having said that, whether an offset account is worth it comes down to your circumstances and how much you’re likely to keep in it.
Some loans with offset accounts come with higher rates, annual package fees or other costs. If those costs outweigh the interest you’re saving, you’ve simply bought yourself an expensive bank account.
The real value depends on how much money you’re likely to keep in the offset and what the loan costs compared with the alternatives.
Look Beyond the Advertised Rate
A lower interest rate can absolutely reduce the cost of a loan, but I wouldn’t choose a product based on the headline rate alone. In fact, the interest rate is often third or fourth down the list of things we consider when working through loan options for our clients.
The reason is simple: the overall cost of a loan is influenced by more than the interest rate.
It sounds obvious when you think about it, but it often catches people out. As consumers, we’ve all been trained to focus on the rate because it’s an easy number we can understand and compare. Instead, we should also be looking at the lender’s policies, loan term, fees, conditions and features.
For example, fees can eat into the saving a lower rate provides. A longer term can make the repayments look better while increasing the total amount paid. An offset or redraw facility may be genuinely useful for one borrower and barely worth anything to another.
Then there are the rules around extra repayments, package fees and other product features that can change how useful the loan actually is once you have it.
For some consumer loans, the comparison rate can also help because it combines the interest rate with certain fees and charges into a single figure. It still doesn’t capture every cost or feature, but it can be a useful starting point.
So the question we ask as specialist brokers is: does the whole loan work well for how you plan to use it?
That means looking well past the advertised rate.
Refinancing Can Reduce the Cost
A loan that was competitive when you first took it out may not stay that way forever.
When we look at refinancing, I want to know whether it genuinely improves the overall position, not just whether the new repayment looks better.
Over time, rates change, products change and your own position may improve. That can make refinancing worth looking at, particularly if there’s an opportunity to reduce the rate, cut fees or move into a loan that works better for you.
But there’s more to consider than the headline saving, which is why we take so much care when working out whether refinancing actually makes sense.
There may be discharge fees, application costs, break costs on a fixed loan or other switching expenses to account for. We also need to look at how much time is left on the existing loan.
That last point can catch people out.
If you have 25 years remaining on a mortgage and refinance it back out over 30 years, the repayment may drop nicely. But you’ve also extended the time you’re paying interest.
Overall, the reason for refinancing needs to make sense, and so does the loan we choose to replace it with. When you’re trusting me to help make that decision, I take that responsibility seriously.
Tailoring the Loan To You
There isn’t one loan setup that will be cheapest for everyone.
Someone who keeps a decent amount of cash sitting in savings may get real value from an offset account. Someone who plans to pay the loan down aggressively may care more about unrestricted extra repayments and redraw. Someone else may deliberately choose a longer term to keep repayments manageable, while still paying extra whenever they can.
This is why I don’t like comparing loans on rate alone or assuming the same product will suit everyone.
The loan needs to work with how you actually manage your money day to day. If the features don’t match the way you’ll use them, you can end up paying for benefits that look good on paper but do very little for you in practice.
Getting that fit right can make a real difference to what the loan costs you over time.
What To Take Away
Paying interest is a normal part of borrowing money, but that doesn’t mean you should pay more than you need to. The aim is to make every dollar of that interest earn its keep.
That’s why I look beyond the repayment and headline rate when comparing options. The loan still has to be manageable today, but we should also understand what it’s likely to cost you over time.
If you’d like help comparing your options and working out which setup makes the most sense for you, get in touch and we can work through it together.
Tom is the founder of BrightCredit and a finance broker focused on borrowing situations that are not straightforward. His writing helps Australians understand credit, loans, and the details that can affect their borrowing options in a clearer, more practical way.