What Increases Your Total Loan Balance?

If you have personal or business loans, learning how your total loan balance grows is important. If you are a small business owner or a single borrower, knowing these elements can arm you with the tools to empower your financial health and prevent an unwanted surprise. This article will break down surefire ways to increase your loan balance and tips on how to control them.

Interest Accumulation

The main reason your loan balance could grow over time is interest. But even when you make payments regularly, your balance can continue to grow because interest accrues on the principal amount you owe, so if your payment amount isn’t large enough to cover the interest, your balance can continue to grow.

How Interest Works

Interest is applied based on your loan’s annual percentage rate (APR) and the balance that is outstanding. If you’re only paying the interest, or less than the interest, your principal doesn’t go down so your overall loan balance is increasing.

EXAMPLE: What Leaves You with a Higher Loan Balance

For example, if you have a loan where the principal is $10,000 and the annual interest rate is 5% If you were making monthly payments that only covered the interest (roughly $41.67 a month), then you would leave your principal untouched and you would not bring down your loan balance.

Late Fees and Penalties

Late fees and penalties can also add to the total of a loan. If you miss a payment or don’t pay the full amount you owe, lenders can charge late fees, and these fees are added to your balance.

Avoiding Late Fees

Enable automatic payments or notifications to prevent late charges or, even worse, penalties. Review your loan agreement to know the grace period and how much late fees will actually increase your loan balance to avoid raising the cost unnecessarily.

Refinancing and Consolidating Loans

Refinancing or consolidating loans can sometimes result in a higher overall loan balance. These options may provide lower interest rates or easier payments but could stretch out the loan term and add up to more interest in the negative long term.

Weighing the Pros and Cons

Make sure you evaluate the new terms before deciding to refinance or consolidate. Now also calculate the total interest you will pay over the life of the loan versus what you currently owe. It’ll help you understand whether a refinance will actually work out for you in the long run.

Practical Tip

Use online calculators to compare your existing loan balance and interest with those of potential refinancing options. This will allow you to see the financial effect clearly.

Negative Amortization

Negative amortization is when your payments are lower than the interest earning on the loan, so the unpaid interest is added to the principal balance. This can cause your total loan balance to skyrocket in the long run.

What Is Negative Amortization? Explained

This is normally seen with some types of loans — for example, adjustable-rate mortgages or some forms of student loans — where initial repayments are lower than the interest that is accruing. As a result, the unpaid interest accrues, which adds to your debt.

Changes in Loan Terms

Loan modification — an alteration to the original loan, like a higher interest rate or longer loan period — may also increase the balance owed on a loan. These changes may happen as a result of changes in the market, or due to specific provisions outlined in your loan agreement.

Posture Monitoring and Alerting

Get educated on your loan terms and if anything has changed. If you expect changes, reach out to your lender to see if there’s something you can do to avoid your balance rising.

Borrowing More Money

It just will naturally increase your overall loan balance — borrowing additional loans or towards existing use of credit lines. There can be a need to take loans for business growth or even for other unforeseen costs but in a careful manner.

Responsible Borrowing

Borrow only what you genuinely need and make certain you can repay it. Avoid overextending your finances: Make sure to work this new loan seamlessly into your financial planning.

Economic Factors

Economic conditions, including inflation or fluctuations in the national interest rates, can indirectly impact your loan balance. Even though you can’t control these factors, being aware of their influence on financial markets can help you prepare and tailor your strategy to respond.

Staying Informed

Stay updated with economic news and trends that could impact interest rates and inflation. This knowledge will allow you to anticipate how your loan will behave and enable you to plan for that behavior.

Conclusion

To understand what increases your total loan balance, you first need to understand what makes your total loan balance go up! Taking proactive steps—through timely payments, refinancing consideration, or learning more about loans—will give you the upper hand in controlling your financial future.

By staying educated and well-informed, you can prevent your loan balance from growing wastefully and you will also improve your financial health.