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There are plenty of financial terms that you’ll come across when you borrow money from a financial institution. Your total loan balance is the most important, as it refers to the amount of money you owe your lenders.
The total loan balance refers to all costs associated with your loan, including the principal amount, interest, and any fees or additional charges. That balance can increase for many reasons, like variable interest rates, late fees and penalties, capitalized interest, and more.
Key Takeaways
Total loan balance refers to the total amount you owe a financial institution for the money you’ve borrowed from them. You’ll likely come across this term for whatever kind of borrowings you have, whether a personal loan, mortgage, or any other loan products you’ve agreed to take.
One important thing to understand is that the total loan balance will be more than the amount of cash you initially borrowed. Unfortunately, people who don’t understand that might get shocked and confused when they first see their total loan balance amount.
That’s because the total loan balance not only includes the principal amount (i.e. the amount of money you borrowed) but also includes other costs associated with that borrowing.
More specifically, your total loan balance will also include:
Being mindful of your total loan balance is essential for two reasons.
Some of these factors are based on your personal decisions, though some are beyond your control.
As you read earlier, your total balance doesn’t just go down as you continue making regular payments. Instead, the amount can also go up either due to choices you’ve made or by circumstances beyond your control.
You can empower yourself by understanding all the factors to control your loan balance as much as possible. H
The first way a total loan balance can increase is with fees and penalties. These two things should seem pretty obvious to most people, especially those who have ever missed a payment deadline and have had to pay extra as a result.
Still, late fees aren’t the only extra charges in this category.
Remember that there are other administrative fees associated with loans. For example, the financial institution might charge processing fees, account maintenance fees, or even a fee for the initial application before you receive the loan.
Fees and penalties might not seem like much at first glance. But remember that they can add up quickly, especially the costlier ones like late fees.
Some loans come with the option of choosing fixed or variable interest rates. Fixed rates are straightforward, as the name suggests, because they won’t change with time.
However, it’s the variable interest rates that you should be mindful of, as they can affect your total loan balance.
Variable interest rates are a double-edged sword that’s beyond anyone’s control. Even the financial institution you owe can’t do much about variable interest rates, despite how much they can impact your total loan balance.
On the one hand, these rates can go down when the overall economy is doing well. But as many homeowners and other borrowers learned the hard way in the past two decades, rising rates will drive up your total loan costs dramatically.
Typically, interest payments are included in the regular payments you make towards the loan. However, there are some instances when that interest goes unpaid.
A typical example is when you receive a loan deferment for something like a student loan. When that happens, a part of the interest goes unpaid despite continuing to accrue.
As a result, the unpaid interest is added to the principal amount, causing your overall loan balance to increase.
Capitalized interest has become a lot more common due to various programs to delay student loan payments, as well as the relief given to borrowers during the recent global pandemic.
Another factor that can drive up your total loan balance is making payments below the minimum required amount.
Although you’re still making regular payments to your lender, falling below the minimum amount is typically regarded as missing the payment deadline entirely.
So, while your payments might go towards reducing your loan balance, it can still lead to the same costly penalties and other charges that make the loan more expensive overall.
Suppose less-than-minimum payments can drive your total loan cost up, as described above. In that case, the same will undoubtedly happen if you miss your deadlines with late payments.
Not only do late payments affect your payment history and credit score, but they’ll also add costly late fees to your total loan balance.
Depending on the terms of your agreement, those late fees could grow even more significant if late payments happen multiple times throughout your loan tenure.
Lenders sometimes offer borrowers ways to ease their burdens, especially if they have trouble servicing their loans. These can come in many forms, like grace periods and forbearances, during which you might make smaller repayments or pause them entirely.
These things can provide you with financial relief, though they have their fair share of side effects.
For example, smaller payments and lengthier repayment periods could mean higher interest in the long run, making your total loan balance higher than before.
In a nutshell, refinancing means taking out a new loan to replace the current one. People refinance their loans for many reasons, like taking advantage of lower interest rates, changing the loan duration, and more.
However, people also refinance their loans for practical reasons. For instance, if people can no longer afford their monthly payments, they might refinance the loan to make those regular payments more manageable.
Sadly, the refinancing terms could mean a higher total loan cost as well. While the loan becomes easier to deal with in the short term, that happens at a higher total loan cost in the long run.
Lastly, your total loan balance can increase if you deliberately add to it by borrowing more money.
No system is perfect and calculation errors can increase your total loan amount. Algorithms that calculate the principal and interest can make a whole host of errors including capitalizing the loan improperly or even assigning you the wrong interest rate. Always do your due diligence and check the math on your loan.
By extending the repayment, you are effectively increasing the amount of time interest can build up and accrue on your loan. Of course, you may reduce your monthly payment, but you will pay more over time, and this increases your total loan amount.
Consider a personal installment loan of $10,000 with a fixed term of 3 years.
Understanding the total loan balance is crucial for effective budgeting and tracking any increases, which may arise from fees or other factors. In this example, the total loan balance of $10,150 encompasses the principal and associated fees, providing a clear overview of the overall amount owed.
On the one hand, there are many reasons why your total loan balance might increase. You’ve discovered 8 of those reasons in the previous section.
Remember: your total loan balance can go down just the same as it can go up. There are several ways you can reduce the total cost quickly.
Suppose you’re still shopping around for a loan and are concerned about the total loan balance you’ll have to deal with.
In that case, your focus should be on choosing better loan terms upfront, even before signing on the dotted line.
Generally, you should only borrow what you need and not go beyond that figure. Take some time to calculate your precise needs and avoid the temptation of borrowing more than that despite anyone else’s encouragement to do so.
When you do those things successfully, you set yourself up for success by keeping your total loan amount as low as possible.
Suppose you’re already servicing an existing loan. In that case, the best thing you can do to reduce your total loan balance quickly is to always pay on time and in full.
Insufficient installment amounts will count as not meeting the minimum payment. In short, you did not pay your installment amount in full. This is another reason why your loan balance may increase.
Remember: prevention is always better than cure. In this case, what you’ll want to prevent is costly late fees and charges.
You can automate your payments to ensure that your total loan balance goes down as and when it should, without any late fees ever being added.
Another powerful way to pay off your total loan balance is to make extra payments whenever possible.
For example, you might get a bonus at work or make extra money on the side. You can channel those additional funds directly to your loan to help reduce the total balance faster than scheduled.
Never underestimate the power of micro-payments. Every dollar counts, so even making extra payments of $10 will go a long way toward reducing your debt.
Lastly, take advantage of any promotions or discounts your lender occasionally offers. For example, some lenders might provide discounts for automating your payments.
Even a tiny discount can go a very long way towards reducing what you owe. As you read earlier, every dollar counts and can make a significant impact on reducing your total loan balance.
Despite the deadline to repay your total loan balance, it’s still an excellent idea to pay it off early.
So, use these advantages by making extra payments and lowering your total loan balance as quickly as possible!
At this point, what you’ve learned is that the total loan balance is the whole amount you’ll owe a lender for the loan you’ve taken from them. The core of that total is the amount of money you borrowed, but there’s also much more to it than that.
Any interest, fees, penalties, and costs associated with that loan also count toward its total amount. Depending on market conditions and the choices you make, you could raise or lower that full amount. Doing the latter will benefit you more, of course.
Both accrual and capitalization can contribute to an increase in your total loan balance, but they operate in different ways.
In summary, both processes can lead to an increase, but accrual is the ongoing accumulation of interest, while capitalization is a one-time addition of accrued interest to the principal.
Simple interest is a straightforward method of calculating interest on a loan or investment. It is based solely on the initial principal amount and the interest rate. Unlike compound interest, which takes into account both the principal and the accumulated interest, simple interest only applies to the original amount.
Compound interest is a method of calculating interest on a principal amount that takes into account both the initial principal and the accumulated interest from previous periods. In essence, interest is calculated not only on the original sum but also on the interest that has been added to it. This leads to exponential growth in the total amount over time.
A debt avalanche is a method of repaying multiple debts strategically and cost-effectively.
This method aims to minimize the total interest paid over time, ultimately accelerating the overall debt repayment process. The debt avalanche strategy is known for its efficiency in reducing the financial burden associated with high-interest debts.
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