"What Increases Your Total Loan Balance?": blogsrabbi.blogspot.com
What Increases Your Total Loan Balance? Understanding the Hidden Costs
When you take out a loan—whether it's for school, a car, or a house—your focus is usually on the principal: the amount you borrow. But over time, you may notice your total loan balance increasing instead of shrinking. That can be frustrating and even alarming. So, what causes your loan balance to grow instead of go down?
Let’s explore the main factors that can increase your total loan balance, even after you've started repayment.
1. Accrued Interest
One of the biggest culprits is interest. Loans come with an interest rate, and this rate determines how much extra you’ll pay to borrow the money. If you're not making payments that at least cover the interest each month, the unpaid interest accrues—meaning it adds up. This is especially common with student loans during deferment or forbearance.
For example, if you have a $20,000 student loan with a 6% interest rate and you’re not paying during deferment, you’re accruing $1,200 in interest every year. If that interest capitalizes (more on that below), your loan balance increases substantially.
2. Capitalized Interest
When interest accrues and then gets added to the principal of your loan, it becomes "capitalized." Now, you’re paying interest not just on your original balance but also on the interest that’s been added. This can lead to a snowball effect.
Capitalized interest often happens after a deferment or forbearance period ends, or when you switch repayment plans. It increases your total balance and the amount of interest you’ll pay over the life of the loan.
3. Missed or Partial Payments
Missing payments or paying less than the required amount can cause your loan balance to grow. Not only do late fees apply in many cases, but unpaid interest and principal may continue to grow. If you're on an income-driven repayment plan and not covering the full interest, your balance can continue increasing even while you make monthly payments.
4. Loan Fees
Some loans come with origination fees, late payment fees, or processing charges. These fees get added to your loan balance. Over time, especially if you're not aware of them, they can compound the total amount you owe.
5. Loan Consolidation or Refinancing
While consolidating or refinancing can offer benefits like lower interest rates or simpler payments, these processes may also increase your balance temporarily. If unpaid interest is rolled into the new loan, your new principal balance may be higher than what you originally owed.
How to Keep Your Balance in Check
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Make interest payments during deferment or forbearance, if possible.
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Choose a repayment plan that covers interest and pays down principal.
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Pay more than the minimum when you can to chip away at both interest and principal.
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Understand your loan terms, especially how and when interest capitalizes.
Your total loan balance isn’t just a static number—it’s influenced by a variety of financial and behavioral factors. By staying informed and proactive, you can avoid surprises and keep your debt from growing beyond control.
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