What Increases Your Total Loan Balance?

Sixty percent of Americans live paycheck to paycheck, so it’s no surprise that many people turn to personal loans to cover unexpected expenses or achieve their financial goals. Although loans can serve as a financial safety net for those who need them, interest and fees can quickly add up. As a result, the amount of debt you accumulate over time can be significant if you don’t take steps to avoid it.

By understanding the factors contributing to and keeping you in debt, you can better manage your loans, reduce your total loan balance, and get out of debt faster. Let’s dive in to learn more.

Understanding your total loan balance

First, let’s define loan balance. Also known as the “outstanding balance,” your total loan balance is the amount you still owe on a loan. It represents the total sum of the original amount you borrowed plus any interest, fees, and penalties.

Monitoring your loan balance and recognizing how your financial habits affect it are essential for effective debt management.

5 reasons your loan balance keeps increasing

Several factors can drive up your loan balance. Here are five common reasons your loan balance might be increasing:

1. Late or missed loan payments

When you fail to make your monthly payments on time, you can incur costly late-payment fees and added interest, which can quickly increase the total amount you owe. Setting up automatic payments or calendar reminders can help ensure your payments post by the due date.

2. Extending your repayment plan

Having extra time to pay off a loan sounds like a good deal, until you realize how much extra you may have to pay. In some cases, it makes sense to request an extended repayment plan, like when a smaller monthly payment works better for your budget. Still, you'll almost always save money in the long run by repaying your loan sooner.

3. Making partial monthly payments

Paying less than the minimum payment amount is still considered a missed payment by most creditors. Even if a lender is willing to work with you and accept a payment that's less than the amount due, you'll still incur fees and late penalties.

4. Variable interest rates

Variable interest rate loans can offer lower rates than fixed-rate loans – until they don't. That’s because variable-rate loans and credit cards are tied to unpredictable market conditions. As such, applying for this type of loan in a strong economy can be a smart move, but you should always be prepared for the possibility that the market can shift. If it does, you could end up paying more over the life of the loan than you expected.

5. Deferring a payment

Some lenders allow you to defer or postpone a payment if you’re experiencing a temporary hardship. Requesting a deferment can help protect your credit score and give you extra time to recover from the financial hiccup. However, even if the lender offers this option without penalty, interest continues to accrue, adding to the principal balance.

5 ways to reduce your total loan balance

When interest accrues daily, paying off a personal loan, credit card, mortgage, or student loan debt can feel like an uphill battle. As with any debt-repayment effort, consistency is key.

Consider implementing the following habits to reduce your total loan balance and get out of debt:

1. Create and stick to a budget

It’s important to have a clearly defined plan to get out of debt. If you haven’t already done so, pick a budgeting method you know you can follow. The right budget should guide your financial goals and keep you on track.

2. Make payments on time

It’s worth repeating — you must be consistent in making payments if you want to reduce your total loan balance. Paying your credit cards and personal loans on time ensures you avoid costly penalties and late fees.

3. Pay more than the minimum payment

There’s nothing wrong with making minimum payments. You’ll avoid late payment fees and see your balance dwindle over time, but paying more than the minimum will help you get out of debt faster. Plus, you’ll pay less interest over the life of the loan.

4. Make a large, lump-sum payment

Whenever you have extra money on hand, make a larger payment on your loan balance to reduce the principal. For example, you might put a portion of your tax return toward a high-interest debt to avoid racking up excess interest.

5. Consolidate debts

Consolidating your credit cards, personal loans, or student loans may lower your interest rate and help you get out of debt faster. Having a single payment can also make it easier to focus on paying down your loan balance.

Take charge of your finances

Let’s face it: sometimes, going into debt is inevitable. Whether you’ve financed a major purchase like a car, needed emergency loans, or accumulated credit card debt, there are steps you can take to keep any total loan balance from getting out of hand.

Check out our debt management strategies to learn more.