When you take out a loan, regardless of whether it is a government loan, a private loan, or a traditional loan, you will be subject to the accumulation of interest over a certain amount of time which is one of the factors that impact your total loan balance.
Many other things can impact this though, and it’s important to know what increases your total loan balance.
Paying less than the requested amount, making late payments, missing payments, deferment, having high credit card balances, having taxable income, having a high debt-to-income ratio, having a poor credit profile, and selecting an extended repayment period are some of the factors that can lead to an increase in the total loan balance.
If you are considering taking out a loan, whether it be for your studies, your company or a home pool, you must have a fundamental understanding of loans and the process of repaying them.
This will allow you to reduce your outstanding loan balance to an amount that is within your means of repayment.
Here’s a more in-depth look at the many things that can affect your loan balance.
Why Do My Loan Balances Keep Getting Higher?
In general, the balance on a loan could increase because of many reasons.
All borrowers would prefer to pay a minimal amount of interest on any loans they take out.
The amount of interest that a borrower is required to pay is determined not only by the rate the lending institution or the bank applies to the loan but also by the type of interest that is specified in the loan agreement.
Here are examples of some of the most typical causes that can lead to an increase in a loan’s outstanding balance:
One of the reasons why your loan balance keeps growing is because of delayed repayments.
Defaulted loans/ non-repayment of loans are typically met with repercussions from the lending institution, be it a bank or another lender.
There are always significant penalties that harm your credit ratings if you take out a loan, fail to pay it back when it is due or make payments later than they should be.
You Have An Extended Payment Plan
An extended contract will increase the outstanding balance of a loan.
Both selecting longer payback periods and selecting shorter ones come with their own set of benefits and drawbacks.
With an extended payment plan, your monthly payments will be reduced to a more manageable amount over a longer time.
This means that the influence of the loan repayment won’t have any further effect on you.
Also, most debtors have access to a plan that allows for an extended payback period.
Given that an extended repayment plan is an option for all types of loans, this suggests that practically everybody could be eligible for such a plan.
The cumulative balance of the loan will go up if the repayment schedule is stretched out over a longer time.
If you opt for a longer payback period, you will pay more overall for the loan than if you opted for a shorter repayment period, as there will be more interest due overall.
If you take out a loan for $1,000 to pay it back in just six months, for example, you will end up paying less overall than someone who has a repayment period of two years.
Most people, particularly those who are paid through an employer, would like to have a longer repayment period so they only pay a little amount each month.
This would allow them to have something reasonable left over after the loans have been withdrawn.
This is a benefit in the short term, but in the long run, you will end up paying more than you would have if you had opted for a shorter repayment period.
Making A Payment That’s Less Than What’s Requested
When you make a payment that’s less than the amount that is required, this results in a higher loan balance, which will reflect the total amount that you have repaid.
If you’re supposed to pay an interest rate of 10%, but you only end up paying 5% on the first year in addition to the principal payments, then the 5% interest that you have not paid will be added to the principal amount of your loan.
It’s extremely important to be aware of this when you make your repayments, and be sure that you pay the full amount that is due.
This will ensure that you don’t accrue any interest on the principal amount of your loan balance.
Missing Or Deferring Payments
Do not fall behind on your payments, as this is another example of what increases your total loan balance.
In the same way that delaying the repayment of your loan will increase the total amount that you will have to pay back, missing a payment, deferring (postponing the repayment), or simply not making a payment when it’s due will also affect the total amount of the loan that you will have to pay back.
Banks don’t like taking risks, and so if you miss a payment, you’re likely to get penalised, and if you have collateral security for the loan, you may end up losing the assets that you have tied as security for the loan.
When you miss/defer payment, the interest will keep rising, which also adds to the principal amount of your loan, depending on the type of loan, as that happens to most loan types.
This will affect your loan balance, and in the long run, your loan will become more expensive.
Summary of What Increases Your Total Loan Balance
These are just a few of the ways that your loan balance can increase. When you take out a loan, you need to carefully look at your financial plan to make sure that you’re able to make every payment on time. If you need some help, you might benefit from some advice from a financial planner, or increase you own financial literacy with some finance books or podcasts.
Timely payments are the best way to stop the interest building up which would cost you more in the long run. This also stops the lender from penalising you, which again will make those costs add up.