What increases your total loan balance? Factors to consider

When considering a loan, it’s important to understand the repayment terms—including details like how the principal and interest are paid over time. Doing so may help borrowers better manage their loans.

But there may be times when the total loan balance owed increases during the repayment process. While this may not be something a borrower expects, there are a few common factors that could explain a balance increase.

Read on to learn about the factors that can cause a total loan balance to increase and ways to decrease it.

Key takeaways

  • Variable interest rates, interest capitalization, and fees and penalties are a few factors that could increase the amount owed on a loan.
  • Borrowers could use tactics like making extra payments, paying more than the minimum amount or seeking out loan forgiveness to potentially decrease the total loan balance.
  • Refinancing a loan or comparing offers on new loans can help borrowers save on the total cost of a loan.

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How to understand your loan balance

In many cases, the amount a borrower owes on an installment loan will end up being higher than the amount they borrowed. That’s because most lenders charge borrowers interest on top of their principal loan payment.

With that in mind, it can be helpful to understand some of the most common concepts that can affect the total cost of a loan. These may include the following: 

  • Principal amount: The amount of money originally borrowed.
  • Interest rate: What the lender charges the borrower in exchange for access to funds.
  • Annual percentage rate (APR): The total cost of borrowing, including interest, fees and other charges. 
  • Fees: Additional charges related to borrowing money, such as origination and payment processing fees. 
  • Loan balance: The amount of money the borrower still has to repay

Understanding these terms can come in handy when evaluating the factors that could increase a loan balance.

4 factors that can increase your total loan balance

Not sure why your loan balance has increased? Below are a few factors that could increase the amount you owe on a loan:

1. Fees and penalties

Borrowers could incur fees and penalties for a number of reasons, ranging from payment processing fees to account maintenance fees or application charges. But some of the most common—and expensive—fees are late fees. 

Late fees are typically charged if a borrower misses a payment deadline. And if a late fee is charged, creditors will often add it to the next month’s statement. Borrowers may also have to pay additional interest as a result of the penalty.

2. Variable interest rates

Also known as adjustable rates, variable interest rates can rise or fall based on market changes. A common example of this is an adjustable-rate mortgage (ARM). With an ARM, a borrower might see their total balance increase if they’re making minimum payments on a payment-option loan or if they have a payment cap on their loan. 

A payment cap means a borrower has a set monthly payment. If interest rates rise and the fixed monthly payment doesn’t cover the increased costs, then the unpaid interest may be added to their principal balance—causing an increase in the total balance.

On the other hand, a payment-option loan allows borrowers to choose between different payment options each month, such as traditional payments, minimum payments, principal-only payments and interest-only payments.

In some cases, minimum payment options may not be enough to pay for the total cost of interest. And the loan provider may add the unpaid amount to the total balance.

3. Capitalized interest

Interest capitalization occurs when unpaid interest is added to the principal balance of a loan. Typically, the interest on a loan is factored into the monthly payment. However, there are some scenarios where interest may go unpaid and continue to accrue

For instance, loan deferment or forbearance can result in interest capitalization. While deferment and forbearance are most often associated with student loans, other types of loans may be placed on hold as a result of relief measures—such as those enacted during the COVID-19 pandemic.

In these scenarios, lenders may add unpaid interest to the loan principal. This may cause a borrower’s total balance and monthly payment to increase, along with the eventual interest paid.

4. Less-than-minimum payments

For borrowers with installment loans, making a payment that’s less than the minimum amount owed could have serious consequences on their remaining balance—and their credit scores

That’s because lenders typically view a payment that’s less than the minimum amount as a missed payment. This can impact a borrower’s payment history and lower their credit scores. The lender may also add any unpaid principal, penalties or interest charges to the borrower’s outstanding balance, resulting in an increase in the total amount owed.

How can you reduce your total loan cost?

Several factors can cause the total balance of a loan to increase. But there may be ways to reduce the overall cost of a loan, too. Consider the following ways to potentially reduce the total cost of a loan:

  • Making extra payments: Making an additional payment or two on a loan balance can help borrowers reduce the amount owed more quickly. By making an extra payment, the borrower pays down the remaining loan balance—and could lower the amount of interest owed on their next payment. 
  • Paying more than the minimum: Similarly, putting extra money toward a loan each month may help borrowers pay off their debt faster and save on interest.
  • Automating your payments: Some lenders may offer discounts when borrowers set up automated payments on loans.
  • Applying for loan forgiveness: With some loans—such as student loans—qualifying borrowers can have some or all of their loans forgiven. If that’s the case, they may have to pay back less than they borrowed.

And if none of these options are suitable, borrowers could consider refinancing their loan. Refinancing can potentially allow borrowers to get better interest rates or repayment terms by replacing their existing debts with a new loan. Refinancing could also give borrowers an opportunity to shop around and compare loan offers. 

But keep in mind that refinancing terms are often based on factors like payment history and credit scores. So it may be a good idea to consider ways to strengthen your credit scores before beginning the refinancing process.

In a nutshell: Factors that can increase loan balances

Seeing the balance on a loan increase can be confusing, especially if you’re working to pay it off. But understanding the most common reasons why your loan balance may increase can help you prevent this from happening.

And as you work to reduce the amount you owe, this guide to paying off debt could help you find a repayment system that works for you—and even let you save money while repaying your loans.

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