What Increases Your Total Loan Balance, and How Can You Decrease It?
Interest, small payments and delays can increase your total loan balance. Here’s what you can do about it.
May 26, 2022
Whether it’s for your education, a car or a home, loans can give you the power to move forward. But even if you faithfully make payments every month, you might notice that your loan balance isn’t budging — it’s actually increasing.
What’s going on? What increases your total loan balance?
This can depend on the type of loan you have, but several factors can actually increase the total amount owed over the life of the loan. It’s hard to break out of the debt cycle, but it isn’t impossible. Learn why your total loan balance is increasing and tips that can help you reduce your loan balance.
Factors that increase your total loan balance on consumer loans
Let’s say you took out a $30,000 loan for a new car. Several factors can increase the amount you owe on that original $30,000, making your loan balance even higher.
If your consumer loan balance is increasing, there’s a good chance that interest is at play.
Financial institutions lend consumers money because the institution makes money on loan interest. If you don’t repay your loans, interest will start accruing, growing your debt and total loan balance. This is called interest capitalization, which means that interest has started compounding and the amount of interest you have will start increasing.
Small monthly payments
If you’re trying to pay down debt, low monthly payments can feel like a blessing at first. They make it possible to start paying something on your loans if you have a low income or have a lot of other monthly payments.
Smaller monthly payments can happen if:
You pay less than the standard repayment amount that your loan provider recommends.
You get a longer-term loan to get a lower monthly payment amount, like a seven-year car loan instead of a four-year loan term.
But the bad news is that low payments can increase your loan balance long term. A longer-term loan might have a lower monthly payment but a higher overall cost.
Tips for decreasing consumer loan balances
So, what can you do to decrease your consumer loan balance? It depends on your situation, but these tips may give you a path forward.
Consolidate your loans
Debt consolidation can allow you to pay your debts at a lower interest rate or a lower monthly payment. This option isn’t right for everyone, but consolidation makes it possible to take out a new loan to pay off multiple high-interest debts. This typically works out if you have higher-interest debt and can get a lower interest rate on your consolidation.
For example, if you have several consumer loans with an 8% interest rate, you might be able to consolidate them with a 3% interest rate. This simplifies your loans by giving you just one payment to a single lender as well as potentially reducing your total loan balance.
Refinance for a lower interest rate
Interest is one of the biggest factors that can increase your total loan balance. If you just can’t get ahead of your debt because of high interest rates, sometimes it makes sense to refinance your debt.
For example, if you have a $25,000 car loan at 7% interest over a seven-year term, your monthly payment would be $377. But refinancing to a loan with a 4% interest rate, your monthly payment would be $342 — that’s $35 saved each month.
Refinancing isn’t right for everyone, but if you’re struggling to keep up with your loan’s interest, refinancing can help you reduce your interest rate or monthly payment.
Make extra payments
Did you know that a significant amount of your monthly payments are just paying for interest and not the loan balance itself?
Extra loan payments can make a difference by decreasing your total loan balance. That’s because of how lenders structure their loans: They intentionally design it so that your minimum monthly payments will cover interest first before even touching the principal balance. Over time, you can amortize (or reduce) your loan total with payments greater than your typical monthly contribution.
If you want your payments actually to drive down your loan balance, you’ll need to make extra payments each month and specifically tell your loan servicer that you want to apply them toward the principal amount.
Trying to add $50 to $100 to your monthly payments might be one way to pay the principal down faster. Some people apply a lump payment to their loan balance once a year. This is great if you know you’ll get a bonus at work at the end of the year, for example.
Factors that increase your total federal student loan balance
There are two types of student loans:
Federal student loans
Private student loans
Federal loans are loans a student secures after filling out the Free Application for Federal Student Aid (FAFSA).
Over 43 million people have federal student loan debt. So if you took out federal student loans to pay for school, you aren’t alone. Federal borrowers could see an increase in their total student loan balance for these reasons.
Interest capitalization can cause an increased balance on federal student loans, just like on consumer loans.
With federal student loans, interest capitalization will happen if:
The deferment period ends
You forbear a loan
The grace period ends
The difficult thing about capitalized interest is that it adds unpaid interest to your accrued interest and principal. This makes your loan balance bigger, which means interest will accrue at a higher rate. It’s a vicious cycle that makes loan repayment even harder.
Income-driven repayment plans (IDR)
Income-driven repayment plans can be a good option for some. However, if your payments are too low, they won’t put a dent in your debt.
For example, if you want to pay off a $60,000 federal student loan (with a 4.66% interest rate) within ten years, you’ll need a minimum monthly payment of $626 to meet your goal. But if you’re paying $150 a month on that loan, you won’t be able to cover the interest on the loan, which would increase the total loan balance every month.
It’s common for federal student loan borrowers to delay their payments with either deferment or forbearance to get a little breathing room. Deferring federal student loans won’t allow interest to accrue in some cases, but forbearance does allow interest to accrue on your student loan payments.
Neither option will decrease your total loan balance. It will either stay where it is (if you aren’t making any payments during a deferment period) or increase because of interest accrual (if you forbear the loans).
Tips for decreasing federal student loan balances
It can feel frustrating to see the balance on your federal student loans increasing even as you make payments. So, what can you do? Depending on your loan and your situation, you can try applying for financial aid or student loan forgiveness.
Apply for financial aid
If you’re still in college and worried about your federal student loan balance, you can try to reduce your debt burden now.
For starters, aim to reduce your overall debt by minimizing borrowing. Try to max out your scholarships and student aid resources before you take out loans, especially from private lenders.
If you can, it’s also a good idea to make payments on your federal student loans while you’re still in school. Since interest doesn’t accrue while you’re a student, try to take advantage of your time by making payments sooner rather than later.
Apply for loan forgiveness
Not every loan type will qualify for loan forgiveness, but programs are available to assist you with your loan. One option is federal student loan forgiveness through the Federal Student Aid office. You can also play with the math via the Student Aid Loan Simulator from Federal Student Aid to understand your options.
Take action to decrease your total loan balance
It’s important to understand what increases your total loan balance. There are different reasons for it, whether you have a consumer loan or a federal student loan. For each type of loan, there are different actions you can take to decrease your loan balance possibly.
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