What Increases Your Total Loan Balance? Expert Breaks It Down

What Increases Your Total Loan Balance

What Increases Your Total Loan Balance? Your loan balance can go up for several reasons, and it’s important to understand what those are so you can manage your debt effectively. In this post, I’ll break down the main factors that increase your total loan balance and give you some tips for keeping it under control. Let’s dive in!

Interest Charges Add Up Over Time

One of the biggest factors that increases your total loan balance is interest. Interest is the cost you pay to borrow money. It’s usually calculated as a percentage of your outstanding principal balance – the amount you originally borrowed.

Here’s how it works: Let’s say you take out a $10,000 loan with a 10% interest rate. That interest rate gets applied to your principal balance each month. So, for the first month, you’ll owe:

  • Principal: $10,000
  • Interest: $10,000 x 0.10 (10%) = $1,000
  • Total payment: $1,000

That $1,000 gets added to your principal balance, making it $11,000. The next month, your interest will be 10% of $11,000, and so on. This compounding effect means your total balance grows each month you don’t pay off the full interest charges.

Over time, interest can really increase your overall debt. For example, with a 5-year $10,000 loan at 10% interest, you’d end up paying over $6,000 in interest charges alone!

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Late Fees Add Up Quickly

Making late payments is another way your balance can balloon. Many lenders charge late fees each month if your payment is past due. This extra fee gets tacked onto your balance, increasing the amount you owe.

Late fees are usually a percentage of your monthly payment. For example, your lender may charge a 5% late fee for each missed payment. On a $200 monthly payment, that’s an extra $10 each month you’re late.

It adds up fast, especially if you’re repeatedly paying late. Let’s say you miss 3 monthly payments in a row. With a $10 late fee each time, you’ve already added $30 to your total balance.

Set up automated payments or payment reminders to avoid late fees padding your balance.

Missed Payments Mean More Interest

When you miss a payment (or make the minimum only), it means less of your balance gets paid off that month. So interest continues growing on a larger principal amount each month.

For example, say your payment is normally $200 and goes to interest first. If you pay only $100 one month, just $100 gets applied to interest. The remaining $100 interest gets added to your balance, increasing the total amount you owe.

Missing payments is an easy way for your balance to balloon out of control. Make it a priority to pay at least the minimum every month.

Debt Consolidation Can Backfire

Consolidating debt with a balance transfer or debt consolidation loan seems like a smart idea. You get a lower interest rate and just one payment to make. But it can increase your total balance in some cases.

How does debt consolidation increase your balance? Here are two ways:

  • You tack on a balance transfer fee that gets added to the total balance. This can be 3-5% of the amount transferred.
  • You’re tempted to use the freed-up cash flow to overspend. Those purchases get added to your new balance.

If you don’t curb spending after consolidating debt, your balance can creep right back up again. Be very cautious about taking on more debt after consolidation.

Personal Loans Offer Fast Cash

Personal installment loans are one of the fastest ways to get extra cash. These unsecured loans provide lump-sum payments upfront, which you repay in fixed monthly installments. But all that upfront cash makes it easy to overspend and increase your total balance.

Let’s say you take a $5,000 personal loan for a home remodel. But you go over budget and rack up $7,000 on your credit cards too. Now your balance is $12,000 instead of just $5,000!

Personal loans are tempting for fast cash. But proceed with caution and stick to your budget to avoid a ballooning balance. Only borrow what you can reasonably afford to repay.

Student Loan Deferment Means More Interest

Student loan deferment pauses your payments temporarily but interest keeps accruing. This increases your total balance over time.

For example, let’s say you owe $30,000 at a 6% interest rate. You defer payments for one year. Even with no monthly payments, 6% interest on $30,000 means $1,800 gets added to your balance over that year!

Deferment gives temporary relief but results in higher interest costs over time. Weigh options like income-driven repayment carefully before deferring student loans.

Medical Debt Adds Up Unexpectedly

Out-of-pocket medical bills are unpredictable and often substantial. These unexpected debts can blast a hole in your budget and increase loan balances fast.

Even with insurance, you may get stuck with thousands in bills for things like:

  • Emergency room visits
  • Unexpected hospitalizations
  • Expensive diagnostic tests
  • Out-of-network providers

Medical debt is a leading cause of bankruptcies in America. If you take out loans to cover medical costs, your total balance shoots upward. Lean on emergency savings when possible to avoid adding to debt.

Work Reductions Mean Less Money for Payments

Losing your job or having work hours cut back severely impacts your finances. With less income, you may need to minimize or miss loan payments just to stay afloat.

Missed payments or interest-only payments mean your balances continue growing. Your total debt gets bigger even as your income shrinks.

Build up an emergency fund so you can still make minimum payments if your income drops unexpectedly. Look for ways to supplement your income through freelancing, part-time work, or selling assets.

Divorce Can Strain Finances

Going through a divorce is emotionally and financially difficult. It often means losing half your family income and doubling expenses to maintain two households.

This financial strain leads many to take on loans and credit card debt just to cover basic living costs. Debt taken on during separation and divorce can inflate your total balances.

If possible, hold off on major joint purchases until after your divorce is finalized. Create a lean budget and see if you can lower your cost of living to adapt to less income.

Moving Expenses Add Up Quickly

Whether it’s across town or across the country, moving is expensive. From hiring movers to replacing furniture, it often costs way more than expected.

Many people finance moving costs with personal loans or credit cards. Even a local move can easily cost $2,000 or more. So moving debt can increase your overall balance.

Give yourself plenty of time to save up for a move in cash. Downsize and declutter before relocating to lower costs. Consider renting a truck and doing it yourself to save hundreds.

Paying Only the Minimum Debt

Lots of people get in trouble by paying only the minimum payment each month. Minimum payments are barely more than the monthly interest charges. When you only pay the minimum, your overall balance hardly goes down at all.

For example, let’s say your credit card balance is $1,000 at 15% APR. The minimum payment is $25. On a $1,000 balance, $15 is monthly interest. Just $10 goes to the principal! It would take over 6 years to pay off at that rate.

Paying the minimum keeps balances inflated. Make it a habit to always pay more than the minimum due. Setting up automatic payments for a fixed amount is a great way to do this.

Low Credit Scores Mean Higher Rates

The lower your credit score, the higher the interest rate you’ll pay on loans and credit cards. Those with poor credit often pay rates of 15-30% or more.

Compare that to good credit rates of 5-15%. The interest really piles on with subprime lending. It becomes extremely tough to make headway on principal when your rate is sky-high.

Building your credit and getting your score over 700 can help hugely in getting affordable loan terms. Pay all bills on time and keep credit card balances low. Dispute any errors on your credit reports.

Job Loss Means Less Income for Payments

One of the major factors that increases your total loan balance is No Job. Losing a job cuts off your main source of income for loan payments. This makes it much harder to pay even the minimum, leading to missed payments and late fees.

Without work, you may need to pause payments, go into deferment, or request forbearance. But remember – interest still builds up during these periods, increasing your total balance.

Having emergency savings and/or unemployment insurance provides a safety net if you lose your job. Cut expenses to the bone and take side gigs until you find a new job.

Staying on top of your loan balances takes some work. But it’s doable if you understand what causes them to rise and take steps to prevent it. Monitor your balances regularly, create a realistic budget, and make paying down debt a priority. Here’s to keeping your balances under control!

FAQs About What Increases Your Total Loan Balance

What Increases Your Total Loan Balance

What are the main ways my loan balances increase?

The most common ways your loan balances rise are:

  • Interest charges accumulating
  • Late fees from missed payments
  • Debt consolidation fees
  • Overspending with loans/credit cards
  • Only making minimum payments
  • Deferring payments but interest still builds

How can I avoid late fees padding my balance?

Set up automatic payments from your bank account, create payment reminders in your calendar, or sign up for your lender’s late fee forgiveness program. Paying on time prevents late fees making your balance balloon.

Should I take a personal loan to pay off credit cards?

This can be smart to consolidate debt at a lower rate. But avoid the temptation to overspend and rack the cards back up. Create a payoff plan and stick to it. Personal loans make it easy to increase your overall debt if you’re not disciplined.

How much emergency savings do I need to maintain payments if my income drops?

Aim for 3-6 months of living expenses saved so you can still make minimum payments if you lose your job or have work hours cut. An emergency fund prevents you from missing payments and ballooning balances.

What’s the best way to pay off loans faster and stop my balances from increasing?

Pay more than the minimum each month. Set up automatic payments for a fixed extra amount to force down your balances faster. And look for opportunities to earn more income you can put toward debt repayment.

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I'm Ellie, a freelance writer with years of experience in the loan industry. Based in the United States, I founded cuploan.net, a loan finance blog providing expert advice and insights. I specialize in creating high-quality content promoting financial literacy and consumer rights to ensure fair and transparent lending access.

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