Listed below are four ways to reduce your borrowing costs:

Understand the key relationships in borrowing: The total interest cost of your loan is directly related to the interest rate. Keep your interest rate as low as possible. The total interest cost of your loan is inversely related to the maturity length. Keep the maturity of your loan short. The amount of your periodic payment is directly related to both the maturity and interest rate of your loan. Keep both low. Finally, some sources of lending are cheaper than others. Generally, parents are cheaper lenders than banks.

Understand the key clauses for consumer and mortgage loans: Remember, all clauses are in the lender’s favor, and very few, if any, are in the borrower’s favor. You are putting your future in someone else’s hands when you borrow—you are committing future earnings to today’s consumption. Use wisdom in your decisions and know what you are doing before you do it. Read documents very carefully and understand them before you sign them.

Know the steps to reducing consumer costs: First, if possible, don’t get into debt in the first place. Remember what Church leaders have said about managing debt and staying out of debt. In emphasizing how burdensome debt can be, President J. Reuben Clark Jr. said the following:

Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. (Improvement Era, Jun. 1938, 328)

Second, remember your goals and budget. Remember that ignorance, carelessness, compulsiveness, pride, and necessity can be offset by wisdom, exactness, discipline, humility, and self-reliance. Remember your budget. If you really need something, plan and save for it, don’t borrow for it.

Third, compare the after-tax cost of borrowing with the after-tax cost of using savings and losing your return. It makes little sense to borrow at a high interest rate when you have savings earning a lower rate. Use the following formula:

after-tax lost return = nominal interest rate * (1 – tax rate)

tax rate = federal, state, and local marginal tax rates

For example, assume you are looking to purchase a new television set. You have $500 in savings earning 4.0% or you can borrow $500 from the television store at an APR of 14.5% for 2 years. If you are in the 25% federal marginal tax rate and 7% state marginal tax rate, instead of earning 4.0%, your after-tax lost return is really only 2.7% or  .04 * (1- (.25 + .07). Clearly it would be better to take your savings and purchase the television set than to borrow the money and pay 14.5% interest.

And fourth, maintain a strong credit rating. The more you do to increase your credit score, the more attractive you will be to potential lenders and the lower the interest rate you will have to pay on your loan.

Reduce the lender’s risk: If you can reduce the risk of the loan to your lender, your lender may be able to offer you a lower interest rate.  You can reduce the lender’s risk in a number of ways:

Use a variable-rate loan: If you choose to use a variable loan rate, the lender is not penalized if market interest rates increase. Be aware that by choosing a variable loan rate, you reduce the risk to the lender but increase the risk for yourself.

Keep the loan term as short as possible: The shorter the term, the less time the lender is at risk.

Provide collateral for the loan: If a lender has collateral for a loan, there is less risk for the lender because the collateral can be sold if you cannot pay back the loan as promised.

Put a large down payment on the item to be financed: Lenders realize that the greater the amount of money you have already paid for an item, the less likely you are to walk away from your loan; lending you money becomes less risky for lenders if you are willing to make a large down payment.