What increases your total loan balance?

When you’re looking to save on the total cost of a loan, it could help to understand two basic concepts: factors that can increase what you owe, and actions you can take to potentially lower the balance. 

What you’ll learn:

• Fees and penalties, capitalized interest, negative amortization and missed payments could increase the total loan balance.

• Paying more toward your loan principal and switching to biweekly payments could decrease the total loan balance.

• Refinancing a loan or comparing offers on new loans could also help borrowers save on the total cost of a loan.

Learning some basics about lending could help you better understand the concept of total loan balance. Here are terms typically associated with installment loans like personal loans, car loans and mortgages:

• Principal: Amount originally borrowed

• Interest: Cost paid to the lender for financing the loan

• Fees: Additional charges related to borrowing money such as origination fees

• Annual percentage rate: Total cost of borrowing including interest, fees and other charges

• Loan balance: Amount the borrower has left to repay

• Loan term: How long the borrower has to pay back the loan

It can help to understand factors that can increase a loan’s balance, especially since some may be within your control.

These are some costs that go beyond a loan’s principal amount:

• Origination fees: These fees cover the lender’s cost to process a loan application. 

• Closing costs: These costs result from a collection of fees and are commonly associated with mortgages. 

• Late fees: Late fees may be added by a lender when payments aren’t made on time.

Typically, the interest on a loan is factored into monthly payments. But in some cases, unpaid interest can accrue. Interest capitalization results when the lender adds that unpaid interest to the loan’s principal balance. 

Interest can capitalize in situations related to loan deferment and forbearance. 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.

Negative amortization can occur when a borrower’s payment doesn’t cover the interest. The unpaid interest can be added to the loan balance, increasing what the borrower owes.

Using mortgages as an example, the Consumer Financial Protection Bureau explains the downside, saying it “can be risky because you can end up owing more on your mortgage than your home is worth.”

With installment loans, lenders typically view a payment that’s less than the minimum amount as a missed payment. Beyond total debt, it can also impact a borrower’s payment history and lower their credit scores.

Keeping up with payments for the term of a loan could help you avoid increasing your total balance. But if your goal is to pay down the debt more quickly, here are some strategies:

• Paying more toward your principal: According to Bankrate, “You can pay more toward your loan principal at any time.” Doing this when possible—for example, when you receive a work bonus—could help reduce your loan balance. 

• Switching to biweekly payments: Bankrate says making half payments twice a month rather than full payments once a month can equal one extra full payment per year.

• Refinancing: If you’re able to find better rates and terms to replace your existing loan, it could simplify your payments and reduce the interest you pay over the life of the loan. Examining fees can help you determine how much savings to expect.

Seeing the balance on a loan go up can be frustrating. But if you understand how loans work and why it happened, it doesn’t have to be confusing. Knowing why can also help you avoid issues and explore ways to pay down debt faster.  

Monitoring your credit is another way to take control of your financial health. CreditWise from Capital One allows you to access your credit report and credit score for free. You don’t have to be a Capital One customer, and using CreditWise won’t impact your credit scores.