How much can you save with lower interest rates?

A little number won’t make a big difference, right?  Too often, that’s the mentality consumers have when purchasing things and using debt to pay for it, whether it’s a new car, putting that big vacation on a credit card, or even taking out a mortgage loan for their house.  Wrapped up in the minutiae and excited about the purchase, consumers often take the first loan that is given to them or don’t adequately research or shop around for the best interest rates.  But the difference in payments you make over the life of the loan can be HUGE!  In fact, the high debt load and high interest rates many families face keep them financially stunted, holding them back from filling up their savings account, funding retirement and investments, and paying off their mortgage. 

So we decided to take a look at just how much money you can save – or spend- depending on small interest rate changes with different types of debt.  Thanks to debt calculators at BankRate.com, we have some telling statistics for you.

"But wait, how do I GET the best interest rates?" you may be asking.  You can’t control where interest rates are these days, but what you CAN control are the factors that will allow you to get the BEST interest rates, no matter what the market is doing, and the most important is your credit score.  

Mortgage:

Let’s assume that today’s national averages are around 4.5% on a 30-year fixed mortgage loan.  By the way, those rates are near historical lows as the all time national average is closer to 7.5%.  So if we compare those two numbers on a $250,000 home purchase over 30 years…

Loan amount: $250,000

Interest Rate:  7.5%

Term: 30 years (360 months)

Monthly Payment:  $1,748

Total Payments:  $629,280

Total Interest Paid over Life of Loan:  $379,280

Or…now, let’s look at that same home loan but with a good interest rate these days, 4.5%. 

Loan amount: $250,000

Interest Rate:  4.5%

Term: 30 years (360 months)

Monthly Payment:  $1,266

Total Payments:  $455,760

Total Interest Paid over Life of Loan:  $205,760

Total Savings:  $173,520

Student Loans:

Loan amount: $29,600

Interest Rate:  3.9%

Term: 10 years

Monthly Payment:  298

Total Payments:  $35,760

Total Interest Paid over Life of Loan:  $6,160

Or…let’s look at a typical interest rate for a private student loan or for a borrower with marginal credit.

Loan amount: $29,600

Interest Rate:  7.75%

Term: 10 years

Monthly Payment:  355

Total Payments:  $42,600

Total Interest Paid over Life of Loan:  $13,000

Total Savings: $6,840

Car loans:

Loan amount: $25,000

Interest Rate:  4.5%

Term: 5 years (60 months)

Monthly Payment:  $466

Total Payments:  $27,960

Total Interest Paid over Life of Loan:  $2,960

Or…

Loan amount: $25,000

Interest Rate:  7.0%

Term: 5 years (60 months)

Monthly Payment: 495

Total Payments:  $29,700

Total Interest Paid over Life of Loan: $4,700

Total Savings:  $1,740

Credit cards:

Loan amount: $20,000

Interest Rate:  18.0%

Monthly Payment: $500

Term: 62 months

Total Payments:  $31,000

Total Interest Paid over Life of Loan: $11,000

Or…

Loan amount: $20,000

Interest Rate:  10.0%

Monthly Payment: $500

Term: 49 months

Total Payments:  $24,500

Total Interest Paid over Life of Loan: $4,500

Total Savings:  $6,500

***

If we add up all those loans with lower interest rates compared to their higher-interest counterparts, we see that you’ll save $188,600 by the time you’ve paid everything off.

Even if you take out the big loan – the home mortgage – you’ll still have saved $15,080 on your auto, student, and credit card loans. 

Those are HUGE numbers and now multiply it by how many cars/kids in college/credit cards your family has.  Even bigger, think about the power of if you used that savings to get out of debt sooner by paying these loans down faster and then used the extra time/money to fund investment that actually brought you a rate of return!  The final outcome can be staggering – literally allowing families to live comfortably and retire early versus struggling with bills and finances every month.