Wait- I Thought My Loan Balance Would Be Decreasing!
Have you ever been surprised when taking a look at your loan statement to find a higher balance than you expected? Maybe you expected to see a decreasing balance; after all, you have been making payments. But somehow, your balance has gone up and you’re wondering what is the cause.
Taking out a loan can be a helpful way to achieve your financial goals, and is a common way that people make big purchases. And as you pay off the loan, you expect the total balance to decline. However that’s not always the case. It’s important to know what increases your total loan balance, so you can plan wisely
To learn more about these factors, and learn how to reduce your loan balance, keep reading. We’ll provide insights and tips to help you repay your loan successfully over time, while watching your loan balance decline.
Variable Interest Rates Could Skyrocket Your Loan Balance
It’s important to be aware of the terms of your loan, especially concerning the interest rate. Interest is the cost of borrowing money charged by a lender, given as a percentage.
If your loan has a variable interest rate, it means that the interest rate can change over time, based on market conditions. This is unlike a fixed interest rate, which stays constant throughout the loan term.
The main concern with variable interest rates is that this can increase your loan balance. Here’s why: When the interest rate goes up, the portion of your monthly payment that goes towards interest also increases. This means a larger portion of your payment is allocated to covering interest, rather than reducing the principal. Then the overall balance may not decrease as quickly as expected. In some cases, if the variable rate jumps more than expected, it may even increase the balance.
To understand the possible effects of variable interest, be prepared for potential rate fluctuations. Carefully review the terms of your loan agreement and understand how the interest rate can change and what the maximum limit or cap is. Know how to negotiate your interest rate with a lender. Budget for potential increases in your monthly payments, so you’re not surprised if variable interest doesn’t work in your favor.
Fees for Late Payments Add Up
Late payments are a surefire way to increase the amount you end up paying back on a loan. If you miss your payment date, lenders charge a late fee. In addition, late payments can also result in a higher interest rate, which increases the total charges. To avoid late payments, some borrowers set up automatic payments or reminders to help you know when the due date is approaching.
Missed Payments Are Expensive
One of the worst things you can do as a borrower is miss a loan payment. When you miss a payment, you may be charged a late fee, and your account may be considered delinquent. The fee may be a set amount, or it may be a percentage of the payment. Missing a payment can result in even more fees and penalty charges, as well as damage to your credit score. Similar to penalties for late payments, missed payments can also result in a higher interest rate.
If you’re at risk of missing a payment, talk to your lender to ask if there are any options to help you stay on track with payments.
Other Fees
Fees can add to a loan balance. Some loans may come with origination fees, application fees, or other charges. These fees are typically added to your balance and increase the overall amount you owe. Fees are not completely unavoidable. However, you can lessen your overall loan balance by comparing offers from different lenders.
To understand the fees involved, read the loan terms and conditions carefully before signing.
Paying Less Than the Minimum Payment
When your payment falls below the minimum amount, lenders may consider it a missed payment rather than a partial payment. This can negatively impact a borrower’s payment history and cause credit scores to tank. The lender may also include unpaid principal, penalties, or interest charges in the borrower’s outstanding balance, leading to an overall increase in the total amount of the loan.
It’s important to note that these consequences can snowball, potentially making it more challenging to repay the loan in full.
Interest Accrual Increases Your Total Loan Balance
Interest accrual is the process of interest charges accumulating on your loan balance. As you make payments on the loan, a portion of each payment goes towards paying down the principal (the original amount borrowed) and a portion goes towards paying the interest.
However, if you don’t make payments that cover the full amount of interest that has accrued, the unpaid interest is added to your loan balance. This is called “interest capitalization” and it can cause your loan balance to increase over time.
It’s important to understand how interest accrual works so you can make informed decisions about how to manage your loan payments and avoid unnecessary increases in your loan balance. It’s fairly simple to prevent this from happening: simply always make the full payment required by the terms of your loan.
To further combat the effects of high interest rates on a loan, you may also consider making extra payments or refinancing at a lower interest rate.
Paying Your Loan Wisely
In conclusion, knowing what increases your total loan balance can help you make informed decisions and avoid spending more than you need to on a loan.
Key takeaways:
- Pay attention to your interest rate
- Compare lender terms to avoid fees
- Avoid variable interest when possible
- Make the full payment required every month
- Make payments on time
By being conscientious about your loan terms and payments, you can avoid costly mistakes that impact your ability to borrow money. These practices can make a big difference in the time it takes you to pay off a loan, and help you reach your financial goals faster.
