Turbo Takeaways

Fees, penalties, deferment, and too much debt are some of the factors that may increase your total loan balance. However, there are several ways to keep your total balance low and manage your debt more economically, for instance, by not missing payments and implementing techniques to pay off your debt faster.

When you take out a loan, interest will accrue over a period of time. Even so, you may have noticed that your total loan balance is increasing rather than decreasing as you make payments.

Several factors can increase your loan balance, including missed payments, deferred payments, and the addition of late fees for repayments received after your due date. 

If you're considering applying for a loan, it is important to understand how loans work and the best way to repay them. This will help you avoid paying more than you have to.

6 Reasons Why Loan Balances May Go Up

Generally, your loan repayments will be planned by your loan issuer in such a way that the outstanding loan balance will go down over time. But there are several reasons why your progress may be interrupted. Here are six such reasons.

1. You Pay Less Than the Minimum Payment

When you pay less than the minimum payment on your credit card or the regular monthly payment on your loan, your total loan balance may increase because of accrued interest that is added to your balance.

To reduce your principal balance, you must make a payment each month that will cover the principal payment as well as the interest charges that have accrued on (i.e., added to) your account for the month.

Example 

You carry a balance of $6,000 on your credit card with an APR of 18%. Your minimum payment is $150 each month, but you only pay $100 each month. This can increase your outstanding credit card balance because the interest on the balance of your credit card is being calculated and then added (or accruing) to your account faster than you’re paying it off each month.

By under-paying, the portion of your normal monthly repayment amount that you didn’t pay for that month remains on your account and is simply added to your card’s balance.  So, you begin to pay interest on the interest you didn’t pay off for the month.

2. You Didn’t Pay Back Your Loan on Time

Not paying back the loan on time or not making monthly payments on time may also be a reason why your total balance increases. 

A delay in student loan repayment or other loans may cost you in terms of late fees, additional interest, and penalties, which will be added to your balance over time. The interest rate for that time will also be subject to interest capitalization, which also causes your loans to grow.

Example

You’ve missed your personal loan payments for the last two months. Other than the principal and interest payments you’ve missed, which remain on your loan account, the lender has also added late fees–amounting to $50/month–to the outstanding balance, so your total loan balance is higher now.

3. You Deferred Payments

Opting for loan payment deferment or debt forbearance typically means that the interest due each payment period will be capitalized to your account instead of paid off, leading to an increase in your total loan balance.

Federal student loans and private student loans usually give students an initial payment deferment (or grace period) of about six (6) months between the time when they end their studies and the date when their student loan payments are scheduled to start. 

It's important to note that during this deferment period, interest continues to accrue on the total student loan balance.

Example 

Your lender agreed to defer your loan payments for six months because you’re facing financial hardship. At the end of the deferment period, you check your statement and find that your loan balance is much higher. Other than the installments that you deferred, the lender has also charged you interest on those installments for the months they remained outstanding. 

4. You Opted for an Income-Based Repayment Plan

If you're eligible for an income-driven repayment (IDR) plan for your student loan(s), you'll be asked to pay what you can afford based on your income instead of what is required to actually bring down your debt. 

In such instances, your monthly repayment amounts under the IDR may sometimes be less than the interest charges. When this happens, the additional interest is simply “capitalized” and added to the balance of the loan.

Income-driven repayment (IDR) plans can cause your loan balance to creep up slowly over time. A standard repayment plan, which is based on a simple 10-year fixed-rate, fixed-payment loan amortization plan, can help you avoid this situation.

Example 

You’ve been in an income-driven repayment plan for your student loan for the last year. Instead of paying the regular installment of $1,000/month, you’ve only been paying $400/month. Over the last year, the difference of $600/month has been accruing interest, which remains on your account instead of being paid off, driving up your loan balance.

5. You Opted for an Extended Payment Plan

When you opt for a longer payment plan, typically 20 years or more, this can reduce the size of your monthly payments. However, it also means that you’ll owe lenders a lot more interest charges over the life of the loan because the longer your debt is outstanding, the more interest can be charged on what you owe. 

During the first few years of the loan term, your fixed monthly loan payments will typically cover the interest charges but very little principal. If you miss a single payment during this time, your balance can go up because the payment amount (which is almost all interest charges) stays on your account instead of being paid off.

Example

If you borrow a loan of $50,000 at an APR of 8.99% for a term of 10 years, your monthly payment will be $633/month, and the total dollars of interest you’ll pay over the entire ten-year life of the loan will be $25,973.

If you borrow the same amount at the same APR of 8.99% but for a term of 15 years (instead of 10 years), your monthly payment will be $506/month, but you’ll pay $41,230 in interest charges over the life of the loan. That’s a difference of $15,257 in additional interest!

6. Calculation Errors

Although it isn’t very common, loan capitalization may also happen because of errors in calculation on the part of your lender or your lender’s payment processor. If you have been making your loan payments regularly, and you see that your total balance has increased, you should get in touch with the lender as soon as possible.

Errors may happen due to many reasons, but your lender can review your loan or credit card account and help you sort out the issue.  

Example 

You’ve been making on-time payments on your personal loan for the past year. However, when you review your yearly statement, you see that the outstanding balance is more than it should be, though there have been no late fees or other penalties. You reach out to the lender to ask about it and find out that it was an error on their part, and it will be resolved.

Factors That Impact Total Loan Balance

There are several factors that may impact the outstanding balance on your loan. Below are a few of the main factors that can impact or even increase your loan balance.

Interest Rates

If you have an adjustable or variable interest rate on your loan, it could impact your total loan balance. Adjustable rates, aka “adjustable Annual Percentage Rates (APRs),” can fall or rise according to changes in the financial markets and the interest rate index they are tied to (such as the Federal Funds Rate or LIBOR).

An adjustable-rate mortgage (ARM) is one such example. With this type of mortgage, you may see your total balance increase if you are making minimum payments or if you have a payment cap on your mortgage.  

An ARM’s payment cap refers to when your adjustable rate mortgage loan has a set dollar limit maximum on the increase in your ARM’s monthly payment, no matter how high interest rates go, during your ARM’s interest rate reset period. When the interest rate on your loan increases, but the monthly payment stays about the same because of the payment cap, the unpaid interest amount may be added to your outstanding balance.

Late Fees and Penalties

You may incur penalties and fees for several reasons, such as application charges, account maintenance fees, or processing fees. One of the most common reasons for incurring charges is late fees.

If you miss a payment deadline, your lender typically charges a late fee of some sort, which is reflected in your statement as an addition to your loan balance. You may also have to pay additional interest due to the penalty.  

Additional Charges

Your total loan balance may also increase due to hidden fees such as loan origination fees, credit life and/or credit disability insurance, private mortgage insurance, and application fees. These fees may be added to your monthly payment, or added to your outstanding balance.

Spend some time understanding the costs associated with borrowing on any loan you’re considering. Your APR or annual percentage rate will give you a more accurate picture of the total loan cost because it includes the interest rate as well as other fees.

Managing Loan Balance Over Time

There are several factors that increase total loan balance, but there are just as many ways to reduce your overall cost and manage your loan balance better over time. Consider these ways to get your loan account back on track.

Minimize Interest and Fees

When it comes to loan repayment, changes in the loan’s interest rate and the capitalization of unpaid interest are the main reasons for financial hardship and increasing loan balances. One of the most effective ways to manage your loan balance is by minimizing interest and fees through timely payments.

Always make sure to pay your loan installments on time to avoid late fees. If you are finding it challenging to manage payments, shop around for lower interest rates and refinance your loan. Consider fixed interest rates or debt consolidation.

If your credit scores are relatively good and interest rates in general come down, you may qualify for refinancing your loan at a lower interest rate. You may also have the opportunity to negotiate a lower rate with your existing lender by showing them an offer from a competitor.

Pay Off Debt Quickly

Another effective way to reduce your total amount is by paying off your debt faster. There are several ways to achieve this. The debt avalanche method focuses on debts with high interest first, which is typically a personal loan or credit card type debt.

Credit card debt and personal loans/lines of credit are typically variable-rate, unsecured debt. As such, they tend to carry the highest interest rates of almost any other debt that a consumer might pay off over time. 

Doing the debt avalanche method will help you save a considerable amount of money on interest charges, as you’ll be paying off your most expensive debts first. This option is ideal for those who are disciplined and want to stick to the repayment plan and have the goal of saving as much as possible on interest charges.

If you need a motivation boost to clear your loans and credit card debt, the debt snowball strategy can be an effective choice. With the debt snowball method, you can start by paying off your smallest debt first. Once you do that, you’ll be motivated to keep going on, to pay off your next biggest balance, and so on.

You can also increase your payment amount or make extra payments on your loans whenever possible, to reduce the amount you owe quickly. Check with your loan provider to see if this option is available for the type of loan you have. Use your bonuses, overtime pay, tax refunds, and windfalls to make extra payments to lower your principal amount.

Who Increases Your Total Loan Balance

There are two main parties involved in every loan product- a borrower and a lender. Each may contribute to the increase in your total loan balance in different ways.

Lenders and Creditors

Lenders and financial institutions may contribute to an increase in your total loan balance by charging penalties and fees for missing payment deadlines or failing to make payments. They may also increase your interest rates.

For example, most credit cards have variable interest rates, so they can change up or down over time. Credit card companies may also raise your credit card account’s interest rate to their “default interest rate” of 30% or higher if you are late for 30 days or more in any one billing cycle.

Borrowers

As a borrower, you may be contributing to the increase in your total loan balance, knowingly or unknowingly. You may have borrowed more than you needed and may be struggling to keep up with payments. 

This may add fees and penalties to your loan balance. If you have opted for loan forbearance or deferment, that may also be a reason why you end up with a higher balance than before.  

Take Action To Reduce Your Total Loan Balance 

Seeing the total balance on your loan increase can be frustrating and confusing, especially when you are working hard to pay it off. But taking the time to understand why it may happen can help you prevent it. Once you pinpoint the reason for an increase, you can then work to reduce the amount you owe.

If you're looking for debt relief, TurboDebt can help. Get in touch with our qualified debt relief specialists to find a debt relief program that's right for you. Connect with us for a free consultation today.