What Increases Your Total Loan Balance?

According to 2023 U.S. News analysis, about 27.8 million people in the United States have a secured or unsecured personal loan. 

While loans can serve as a financial safety net for those who need them, added interest and fees can make getting out of debt difficult. By understanding the factors contributing to your debt, you can better manage your loans, reduce your total loan balance, and keep your monthly budget in check. 

Understanding your total loan balance 

Your loan balance or “outstanding balance” is the amount you still owe on a loan. This balance 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. 

6 factors that increase your total loan balance 

1. Late or missed loan payments 

When you fail to make your monthly payments on time, you can incur costly late fees and extra interest, which can quickly increase the total amount you owe. These added amounts can put you into more debt over time and make paying your loan off even more difficult. 

Setting up automatic payments or calendar reminders can help ensure your payments are posted by the due date. It also helps to physically write your payment due dates on a calendar or notepad. Just make sure it's in a spot that you see every day, like your fridge or kitchen counter. 

2. Extending your repayment plan 

Having extra time to pay off a loan sounds like a good deal until you realize how much more you may have to pay. Depending on your lender, extending your repayment plan could often come with extension fees, more interest, and even higher interest rates. 

Sometimes it might make sense to request an extended repayment plan, like when a smaller monthly payment works better for your budget. But you'll almost always save money in the long run by repaying your loan sooner. 

Talk to your lender about repayment options so you’re aware of any added fees. 

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 partial payment, you'll still incur fees and late penalties. 

In addition to fees, interest continues to accumulate on the amount you still owe. So, you’ll be paying more interest in addition to late fees, which adds to your overall loan balance. Keep in mind that making partial monthly payments or late payments can also hurt your credit score unless you discuss this option with your creditor beforehand. 

4. Variable interest rates 

“Interest could increase your loan balance significantly, especially if you’re only making minimum payments.”

If you’re wondering what increases your total loan balance, variable interest rates are often a huge culprit. 

Variable interest rate loans, or floating interest rate loans, can offer lower rates than fixed-rate loans. However, they can also offer higher rates, making the loan difficult to pay back. That’s because variable-rate loans and credit cards are tied to unpredictable market conditions. 

Something to note is that variable interest rates can fluctuate multiple times throughout the year. It’s easy to be caught off guard with a new interest rate, and this can affect your finances. With that said, 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. 

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 any penalties, interest will continue to accrue. This increases your total loan balance over time. 

6. Origination fees 

When you take out a loan, you’ll have to pay an origination fee. These are one-time, often non-refundable payments that typically consist of a percentage of your loan. They can also be a flat rate fee, depending on the lender. 

This origination fee is added to your overall loan amount, which increases your total loan balance. 

How 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. With an idea of what increases your total loan balance, you’ll need to understand what steps you can take to reduce it. 

Create and stick to a budget 

It’s vital 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 keep you on track and give you an idea of how much you need to put aside for loan payments each month. 

Make payments on time 

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. It’ll keep your credit score in good standing as well. 

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 and reduce your overall interest accumulation. Try to make lump sum payments in addition to the monthly minimum to get your loan paid off sooner. 

Remember that interest could increase your total loan balance significantly, especially if you’re only making minimum payments. 

Consolidate debts 

Consolidating multiple debts like 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. A Line of Credit could help you consolidate smaller debts and turn multiple payments into one. 

Take charge of your debt 

Sometimes, increases to your total loan balance are inevitable. Luckily, whether you’ve financed a major purchase or needed emergency loans, there are steps you can take to keep any total loan balance from getting out of hand.