What is Increasing Your Total Loan Balance?

When you take out a loan, you expect your balance to go down with each payment you make. But sometimes, even if you’re making payments, your balance doesn’t shrink the way you expect — or worse, it grows.

If you've been keeping an eye on your loan statement each month, you might be wondering: Why isn’t my principal balance decreasing faster? Can paying late cause my total balance to go up? And why do I owe more than I originally borrowed?

Understanding how loans work and how your payment habits affect your balance can help you stay on track and avoid paying more than you need to. Let's break down the common reasons your loan balance might be growing and what you can do about it.

4 payment practices that can add to your total loan balance

Let's look at four specific payment habits that could increase your total loan balance.

1. Making late payments

You know your due date, but do you know whether your lender has a cut-off time for accepting payments? If they do, your payment could be late, even if the calendar seems to be on your side.

For example, a lender might require payments to be made by 8:00 PM EST on your due date. If you submit your payment at 9:00 PM, it may not be processed until the next business day, which could result in it being considered a day late.

Some lenders offer a grace period — a short time after the due date when you can still make a payment without penalties. However, not all lenders provide this option. Without a grace period, interest continues to accrue on your total balance immediately after the missed due date. The longer your payment is delayed, the more interest accumulates, potentially increasing your overall debt.¹

If making late payments becomes a regular issue, some lenders reserve the right to increase your interest rate.²

2. Missing payments

Each payment you make is another step towards paying off your loan. But missed payments could cost you more than time.

When you pay on your due date, your balance goes down, and the next month’s interest is only charged on what’s left. When you miss a loan payment, the full unpaid balance continues to accumulate interest. This interest is added to your total balance and can make it larger than it was before the missed payment. The penalties and late fees that lenders charge for late payments often apply to missed payments, too.

These additional interest charges and fees can quickly add up, causing a significant increase in your total loan balance.

3. Paying less than the minimum due

Paying less than the minimum amount due on your loan can slow down your repayment, causing your loan to take longer to pay off. This gives interest more time to accrue, which can increase your total loan balance and the overall amount you pay over time.

But the impact doesn’t stop there. Some lenders may still consider your payment late if you don’t pay the full minimum by the due date, which could lead to a late fee. And if this becomes a pattern, it may also hurt your credit score, making it harder to qualify for credit or loans in the future.

4. Deferring payments

If you’re experiencing financial challenges, such as a job loss, you may be able to request deferred (delayed) payments for a short period of time. For example, the lender may move your payment for the month to the end of the loan term to give you an extra month to catch up. This may help you temporarily avoid late fees and penalties. However, lenders may not defer interest during the agreed upon period.

When you’re ready to start making payments again, you might find that your total loan balance is higher than you expected.

Strategies that may help you pay down your loan balance faster

Taking steps to be more proactive about payments may help you pay down your loan faster. Consider whether these ideas might make sense for your financial situation.

Pay on time, every time

Making consistent, on-time payments can help you chip away at your balance without late fees or extra interest holding you back. Here are a few tips to help you make your payments on time, every single month.

• Calendar reminder: Add your upcoming payments to a calendar to help you stay on track. You can write them down on a paper calendar or planner, or schedule them on your phone or digital calendar with alerts that notify you before a payment is due.
• Payment reminders: Some lenders offer the ability to set payment reminders, sending you an email or text message to alert you to upcoming payment due dates.
• Automatic payments: You can set up automatic payments that pull funds directly from your checking account to make sure you won't miss a payment.

Pay more than the minimum

Paying more than the minimum amount due could help you pay down your loan more quickly. Repaying your debt sooner can also save you money on interest. Just make sure your loan terms allow you to pay extra on the principal balance. Some lenders may charge a prepayment penalty, which is a fee for paying off your loan early.

Make more frequent or extra payments

Some lenders give you the option to split your monthly payment into smaller, more frequent payments like weekly or biweekly instead of paying once a month. Paying more often can reduce the amount of interest that builds up between payments, helping you lower your total interest costs and pay off your loan faster. Check with your lender to see if this option is available.

You can also make extra payments when you have room in your budget. Applying extra payments towards your loan can help you reduce your balance quicker. Even occasional extra payments can make a difference over time. Just be sure to check your loan terms to make sure extra payments are allowed without penalty, and if possible, have them applied directly to the principal.

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Stay on track with smart payment habits

Watching your loan balance increase may seem frustrating, but understanding what factors can affect your balance can help you in the long run.

As you work towards making more proactive decisions about how you manage your loan payments, remember to celebrate the small wins. Each payment brings you closer to your goal of being debt-free.

Sources

1. https://www.investopedia.com/terms/g/grace_period.asp
2. https://www.investopedia.com/terms/p/past-due.asp