Loans are important tools that can help individuals and businesses achieve their financial goals. Once you apply and qualify for a loan, the lender expects you to repay the debt within a certain period of time. At times, you may notice an increase in your outstanding loan, which can occur for several reasons. What increases your total loan balance, and is it something that you can prevent? Find out below.
What is a loan balance?
A loan balance is the amount you still owe to the lender after you have already paid a portion of the loan. Lenders calculate the loan balance by keeping track of the borrower’s interest rate, repayment terms and frequency of payment.
The interest rate is the amount a lender charges for issuing the loan. The amount that you will eventually pay in interest will depend on factors like your credit score, type of loan, and your repayment term. The longer your loan repayment term the higher the interest will be. The frequency of loan payments may vary depending on the lender and can either be on a monthly, bi-weekly, or weekly basis.
7 factors that can increase your total loan balance
Understanding the components that can increase your loan balance can help borrowers avoid getting into unnecessary debt and financial stress. Here are some of the most common factors that can increase your total loan balance.
1. Interest rates
The interest rate is determined by the type of loan you applied for and the lender’s policies. Generally, the cost of borrowing will increase if the interest rate is high.
Interest rates can either be fixed or variable. A fixed interest rate remains the same throughout the loan term, and your monthly payments will remain constant. Variable interest rates fluctuate over time and can either increase or decrease based on economic conditions and government policies.
2. Late fees and penalties
When you do not repay your loan on time, the lender may charge a late fee as a penalty. Other charges that come with the loan like prepayment penalties and annual fees can also increase the loan balance to loan amount. You can avoid late fees and other potential charges by paying the loan in full and on time. Setting up automatic payments can also help you stay on track with your loan repayments.
3. Loan modifications
Most lenders agree to modify the repayment plan if you have difficulties repaying the loan. The lender may extend the loan term or lower your interest rate, making it easier for you to repay the loan. While loan modification can make the payments more manageable, changing the loan terms will also increase the amount you will eventually pay. An example is when the lender extends your loan duration, meaning that your interest will increase over the life of the loan.
4. Borrowing more money
When you borrow another loan on top of the existing one, the new loan will have its own repayment terms that may be different from your original loan. It will be like having two types of loans at the same time, and this can make it difficult for you to keep track of payments and manage your overall debt.
Loan refinancing can at times increase the total loan balance, depending on the terms of your new loan. When you refinance, you are getting another loan with lower monthly payments and it could have a longer repayment period. But once the loan term extends, the borrower will end up paying more in interest. Refinancing may also attract additional fees such as application fees, appraisal fees, and origination fees.
6. Loan consolidation
Loan consolidation is the process of combining multiple debts like payday loans, credit card debts, and other smaller debts into a single loan that will simplify the repayment process.
7. Defaulting on your loan
Defaulting on a loan can increase the total payments due. The longer you default the more interest will accrue. It can also result in a damaged credit score and high-interest rates on future loans.
Tips for managing your loan balance
Before applying for the loan, ensure that you understand the terms and conditions that come with it. Knowing the loan terms will make it easier to plan your budget and ensure that you pay off the balances on time.
Advantages of paying off a loan balance early
Repaying your loan early gives you a chance to save money on interest. You will also have a good payment history, making it easier to qualify for affordable loans. As long as you stick to the agreed-upon loan terms, it could potentially boost your credit score, too.
What to do if you’re struggling with a loan balance
One of the solutions for managing your loan balance is to refinance your loan. Refinancing can potentially lower your interest rate and reduce your monthly payments. Some lenders also offer repayment programs such as income-driven repayment or deferment options that can help you better manage the debt. You may also check whether you qualify for a government assistance program offered to consumers who are struggling with debts.
Managing Loan Balances For A Brighter Financial Future
Knowing how to manage your loan balances is the key to unlocking financial opportunities in the future. Remember to always make payments on time and explore your options if you’re struggling to keep up with your debt.
How can I avoid increasing my loan balance?
To avoid increasing your loan balance, make payments on time, and avoid taking on additional debt unless it is absolutely necessary.
What happens if I am unable to make my loan payments?
If you are unable to make your loan payments, you may incur late fees and penalties and damage your credit score.
Can I negotiate with my lender to lower my loan balance?
You can negotiate with the lender to lower your loan balance through refinancing or loan modification.