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A man seeing his total loan balance go up from a missed payment

10 Things That Increase Your Total Loan Balance

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

  • The total loan balance is the entire amount owed to a lender for a borrowed amount, including the principal amount, interest, fees, and penalties.
  • It's crucial to realize that the total loan balance exceeds the initial borrowed cash, requiring borrowers to be aware of the comprehensive costs associated with their loans.
  • Proactive measures can be taken to reduce the total loan cost quickly, including choosing favorable loan terms upfront, consistently paying on time and in full, automating payments to avoid late fees, making extra payments whenever possible, and utilizing promotions or discounts offered by the lender.

What Is Your Total Loan Balance?

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:

  • The interest you owe for the money you’ve borrowed.
  • Any necessary fees for receiving the loan, such as processing fees.
  • Late fees and penalties (if any).
  • All other costs associated with the loan.

Being mindful of your total loan balance is essential for two reasons. 

  • Firstly, it helps you understand how much you truly owe the financial institution that lent you the money. You can use that knowledge to accurately budget how much you need to set aside from your income and understand how long it’ll take to completely repay the loan.
  • More importantly, it also helps you keep track of any increases in the total loan balance. Unfortunately, many borrowers assume that their total loan balance will only ever go down. Several factors can cause you to increase the entire balance, whether or not you’re aware of it.

Some of these factors are based on your personal decisions, though some are beyond your control.

3 Factors That Can Increase Your Loan Payment

When you take out a loan, you generally expect to make consistent payments over time. However, several factors can cause your loan payments to increase. Understanding these factors can help you manage your finances more effectively and avoid surprises. Here are three key factors that can cause your loan payment to go up:

1. Taxes and Insurance

We believe this is the most common for most Americans. For mortgages, lenders often require you to pay property taxes and homeowners insurance through an escrow account. This means a portion of your monthly mortgage payment goes towards these expenses. The lender then pays these bills on your behalf when they come due.

Impact on Payments

If property taxes or insurance premiums increase, your monthly mortgage payment will also rise to cover these higher costs. While these increases do not affect the principal balance of your loan, they do increase your overall monthly payment obligation.

If your property taxes increase by $600 per year and your homeowner's insurance premiums rise by $300 per year, your monthly mortgage payment will need to increase by $75 to cover these additional costs ($600 + $300 = $900 / 12 months = $75).

2. Adjustable Interest Rates

Many loans come with interest rates that can fluctuate based on changes in financial markets. These rates are referred to as variable rates for credit cards and adjustable rates for mortgages. In both cases, the lender ties your interest rate to an industry index, such as the prime rate for credit cards or the LIBOR (London Interbank Offered Rate) for mortgages.

Impact on Payments

When the index rate increases, your interest rate and corresponding monthly payment will also increase according to the terms of your loan agreement. This means that even if your loan principal remains the same, the total amount you need to repay will be higher due to the increased interest costs. Conversely, if the index rate decreases, your payments may go down.

For a mortgage with an adjustable rate, if the LIBOR increases from 2% to 3%, and your loan terms stipulate that your rate is the LIBOR plus 2%, your interest rate will rise from 4% to 5%, increasing your monthly payments.

3. Late Payments

Penalty interest rates are imposed by lenders as a consequence of late payments or other breaches of your loan agreement, such as a bounced check. These rates are significantly higher than your standard interest rate and serve as a deterrent against missed payments.

Impact on Payments

If you miss a payment, your lender might impose a penalty rate, which can dramatically increase your monthly payment amount. While this does not increase your loan balance, it does increase the overall cost of the loan, making it more expensive to pay off the debt over time.

If your credit card has an annual percentage rate (APR) of 15% but imposes a penalty rate of 29.99% for late payments, missing a payment can almost double your interest rate, leading to much higher monthly payments and total repayment costs.

By being aware of these factors, you can better manage your loan and prepare for potential increases in your monthly payments. It's essential to read and understand your loan agreement and stay informed about changes in interest rates, payment schedules, and any penalties that could affect your financial obligations.

10 Factors That Increase Your Total Loan Balance

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. Here are 9 ways you could see an increase in your total loan balance:

1. Fees and Penalties

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.

2. Variable Interest Rates

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.

3. Capitalized Interest

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.

4. Less-Than-Minimum Payments

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.

5. Late Payments

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.

6. Grace Periods or Forbearance

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.

7. Refinancing

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.

8. Additional Borrowing

Lastly, your total loan balance can increase if you deliberately add to it by borrowing more money. Some loan types, especially those involving revolving credit, enable you to borrow more money whenever needed. Of course, doing so will increase the principal amount that you owe, as well as the interest you’ll have to pay.

9. Errors

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.

10. Extending Repayment

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.

Sample Total Loan Balance of an Installment Loan

Consider a personal installment loan of $10,000 with a fixed term of 3 years.

  • Principal Amount (initial borrowing amount): $1,000
  • Fees: $50 processing fee
  • Total Loan Balance: $1,050

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.

How to Quickly Reduce Your Total Loan Balance

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. Here are 5 ways to reduce your total loan cost fast:

1. Choose Better Loan Terms Upfront

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.

2. Pay On Time and In Full

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. Doing that relentlessly will lower the total amount you owe right on schedule.

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.

3. Automate Your Payments

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.

4. Make Extra Payments

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.

5. Use Promotions and Discounts

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.

Advantages of Paying Off a Loan Balance Early

Despite the deadline to repay your total loan balance, it’s still an excellent idea to pay it off early. You stand to benefit financially and emotionally from doing so, as you’ll enjoy these advantages:

  • Reduced interest. First and foremost, paying off your loan balance early will reduce the total interest you pay.
  • Reduced stress. Additionally, wiping out your debt can help you reduce your overall stress and anxiety. That’s because you’ll go through life with one less thing to worry about in your finances.
  • Financial flexibility. Lastly, you’ll give yourself plenty of financial flexibility. Not only will you save money by paying less on interest, but you’ll also free up some of your regular cash flow. You can update your budget to use that money for anything else you want!

So, use these advantages by making extra payments and lowering your total loan balance as quickly as possible!

Final Thoughts

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.

Related Frequently Asked Questions (FAQs)

What Increases Your Total Loan Balance, Accrual or Capitalization?

Both accrual and capitalization can contribute to an increase in your total loan balance, but they operate in different ways.

  • Accrual refers to the accumulation of interest on the principal amount of the loan over time. 
  • Capitalization, on the other hand, involves adding the accrued interest to the principal, resulting in a higher overall loan balance.

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.

What Is Simple Interest?

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. 

What Is Compound Interest?

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. 

What Is a Debt Avalanche?

A debt avalanche is a method of repaying multiple debts strategically and cost-effectively.

  • With the debt avalanche approach, you prioritize paying off debts with the highest interest rates first while making minimum payments on the others.
  • Once the highest-interest debt is fully repaid, you redirect the funds to the next highest-interest debt, creating a cascading effect.

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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